Cashing in your investment

How much freedom do you have when it comes to selling your business? Manzoor Ishani reveals

Many franchisees choose franchising because after a number of years of hard work and dedication, they would have built up a business, which they will eventually be able to sell.

The latest NatWest/bfa survey shows that 13 per cent of franchisees buy a franchise to increase their investment.

However, things are seldom straightforward. Franchisees who buy on a promise from the franchisor that they will be able to sell often forget that any such promise was coupled with certain conditions. Certainly most franchise agreements are very clear about such conditions. However, at the time of buying a franchise, franchisees are concerned about other things such as securing the franchise and starting the business and, having established that, whether they have the right to sell, but, overall, they do not concern themselves too greatly about the fine detail of the conditions.

So what exactly are these conditions? Most are:
• Re-training where necessary
• Refurbishing of premises (where appropriate)
• Upgrading the franchised business
• The payment of the franchisor's costs and (sometimes but not invariably) a fee by way of renewal
• Obtaining the consent of the franchisor
• Rights of first refusal in favour of the franchisor (sometimes)

Most seem innocuous enough but the devil, as they say, is in the detail. The condition that creates the most difficulty is the one which requires the franchisee to obtain the franchisor's consent.

Franchisees need to be reminded that one of the prime objectives of a franchisor is to ensure that standards are maintained, and this means ensuring that all franchisees satisfy the franchisor's criteria with regards to ability, skill, financial strength, character, etc. Just as franchisors are very careful in the selection of their initial franchisee, they are keen to be equally careful in approving an incoming franchisee that buys from an existing one.

It makes sense therefore that all prospective franchisees satisfy the franchisor's criteria and pass the same rigorous tests.

Those franchisees, while accepting the condition, can feel uncomfortable about the franchisor retaining total discretion as to who they can sell their business. It is a circle that cannot be fully squared and franchisees usually content themselves with having to rely on the reputation of the franchisor by talking to existing franchisees and doing their homework to see whether or not in the past, the franchisor has exercised such powers as it has retained, reasonably.

Past conduct is of course no guarantee as to future conduct, but it is now by and large accepted practice that most prospective franchisees rely on the reputation of a franchisor amongst its franchisees.

It is not all one sided in favour of the franchisors. One has to remember that a franchisor has little to gain by being obstructive and in my experience there has been virtually no abuse of such a condition by a franchisor.
As always a distinction has to be made between those franchisors who are ethical and those who are not.

Prospective franchisees therefore need to take care to investigate the franchisor's track record and background thoroughly, and to take proper advice on the franchise agreement, because the same set of conditions can have remarkably different effects when operated by different franchisors.

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