By Cliff Ennico
SucceedingInYourBusiness.com
"I bought a well-known franchise 12 years ago and have built my territory into a multi million dollar business.
I decided last year to retire and sell my franchise but the franchise has thrown a number of roadblocks into the process. I had a potential buyer for my entire territory but the franchise balked at approving the sale because they said they felt the buyer was 'too entrepreneurial' and 'would have difficulty coloring within the lines'.
I have been approached by other potential buyers but none of them can afford to pay what my entire franchise territory is worth, and the franchise is flat out refusing to subdivide my territory to make it more attractive to these potential buyers. I'm more than willing to subdivide my territory if it will make it easier to sell the whole thing over the next couple of years.
I'm at my wit's end about what to do here. It appears that I may be the victim of my own success in realizing the fullest potential from my franchise territory."
Franchises can be wonderful investments, as long as you and the franchise agree on everything. When you and your franchise disagree, life can be a lot more complicated than it would be in a standalone business.
When you buy a franchise, you trust that the franchise and its management team knows more about the business than you do. Owning a franchise is exactly halfway between running your own business, and working for someone else. At the end of the day, while you own your franchise territory, you don't own the business model -- you are executing someone else's model in your territory.
What has happened here (and it frequently happens) is that there is a conflict between what you think is right for your particular territory, and what the franchise thinks is right for the franchise system as a whole. Until that conflict is resolved, it will be difficult for you to sell your territory because the franchise must approve any "resale" to a new franchisee.
First, some basics. When you own a franchise but want out of the system, you generally have only three options. You can:
- Wait until your franchise term comes up for renewal and refuse to renew
- Sell your franchise to a third party with the franchise's approval
- You can negotiate a termination "by mutual agreement" with the franchise (your franchise agreement probably does not offer this option, but in my experience virtually all franchises will negotiate a termination with you as it saves them the cost and embarrassment of having to declare default and explaining the circumstances to current and future franchisees).
My first question is whether your franchise had the right to block your sale to the buyer who was willing to pay market value for your territory. Assuming your sale price was north of $1 million, such buyers do not grow on trees. Your franchise agreement probably imposed several conditions on your ability to sell, one of which was the franchise's approval of your prospective buyer. You should talk to an attorney familiar with franchise disputes and ask him/her whether under case law a franchise may refuse a potential buyer "in its sole discretion" or if there is a requirement for the franchise "not to unreasonably withhold" its consent.
If franchises are required to be "reasonable" in approving prospective new franchisees, that may give you some ammunition in court or an arbitration proceeding.
The franchise's refusal to subdivide your territory is a bit stickier, as most franchise agreements state clearly (and the law backs them up) that the determination and allocation of franchise territories is solely within the franchise's discretion at all times. Simply put, you won't be able to force the franchise to subdivide your territory if they feel that doing so is not in the best interest of the franchise system as a whole.
One possible solution would be for the franchise itself to buy your territory if you cannot find an acceptable buyer within the next X months (there's a clause in the franchise agreement allowing them to do that), but you are unlikely to get the same competitive price you would get from an arm's length buyer.
Another possible solution is for you to retain a
franchise broker. While you will need to pay a fee for their services, these people know what franchises look for in potential franchisees and can help you "vet" prospective buyers so you are more likely to get the franchise's approval the next time around.
I would propose that you arrange a meeting with the franchise's senior management at their corporate headquarters and discuss your dilemma with them face to face. Your franchise will not want to kill a goose that's laying golden eggs and will have a strong incentive to work out a solution for a top-performing franchisee, because they will know all of their other franchisees with large, highly profitable territories will be watching and waiting on the outcome.
Cliff Ennico (
cennico@legalcareer.com) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at
www.creators.com. COPYRIGHT 2016 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC.Permission granted for use on DrLaura.com.
