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The franchisee is ready to sell and there’s a buyer ready. But what if the incoming franchisee isn’t a good fit?

The value of your brand is comprised of a number of different factors, consumer awareness, consumer loyalty, brand association to name a few.  One other factor that influences the value of your brand and its success overall, is your franchisees.

Franchisees may wish to sell their franchised business for a number of reasons:

• the franchisee has other business interests that they wish to concentrate on;
• retirement or a sea change;
• the franchisee’s plan was to sell the franchise after a specific number of years in order to make a profit;
• or they may simply have realised that the business is not right for them.

Whatever the reason, for a franchisor, it’s a fine line between wanting to keep franchisees, especially those that are great brand ambassadors and wanting to create opportunities for a fresh faced prospective franchisee who is enthusiastic to come in and grow the franchised business.

What is even more important for a franchisor is to ensure that any prospective franchisee is the right fit for the franchise and the brand overall.

The truth is that no two franchise systems are the same, so it makes sense that the profile of a franchisee that a franchisor is looking for is different.

While experience is no doubt important it should not be the deciding factor in choosing a franchisee. Instead franchisors need to look for certain characteristics and common traits that they know their franchisees should have. Getting the right people for their franchise system is half the battle, the other half can come from training and teaching franchisees everything they need to know about being a successful franchisee in the network.

Stringent criteria need to apply to franchise resale buyers

From my experience it appears that franchisors often impose a more stringent criteria on a new franchisee for a brand new site than on an incoming franchisee coming in as a result of a franchise resale.

On a resale what often happens is that a franchisor will approve an incoming franchisee without proper consideration on whether that incoming franchisee is the right fit for the network. Often this is as a result of a franchisor trying to exit a franchisee out of their system or trying to appease a franchisee who is desperate to sell the franchised business.  Whatever the case may be, a franchisor has a duty to carry out its own due diligence on an incoming franchisee to ensure that they are the proper fit for the network.

Just as a franchisee undertakes due diligence on a franchisor and the franchise system, so should a franchisor undertake its own due diligence on an incoming franchisee – greenfield franchise buyer or resale hopeful. Any due diligence undertaken should give a strong indication to a franchisor on whether the incoming franchisee is the right fit for the network.

While it is never easy to say no to a franchisee, it is by far easier to say no at the outset than to take on a new franchisee who disrupts the network and causes irreparable damage to the brand.

So what happens if the prospect is a poor fit?

A franchisor cannot unreasonably withhold consent and must advise franchisee of the reasons why consent was not given.  The Franchising Code of Conduct and most franchise agreements set out a non-exhaustive list of the circumstances in which a franchisor may reasonably withhold consent.

Provided that the circumstances are reasonable and are explained to the franchisee, then a franchisor should feel comfortable making the decision.

There are no limits on how many times a franchisee can seek the consent of the franchisor and as such no limits on how many times a franchisor can consent or withhold consent to a transfer.

While it is never easy to say no to a franchisee, it is by far easier to say no at the outset than to take on a new franchisee who disrupts the network and causes irreparable damage to the brand.

One of the biggest challenges a franchisor faces in deciding whether an incoming franchisee is the right fit or not, is ensuring that their current franchisee is also satisfied.  It is important that as a franchisor you set the expectations from the outset and make it clear to your current franchisees what you expect from any incoming franchisee and what that incoming franchisee looks like and their role in the franchised business and network overall.

Getting it right at the outset, setting clear expectations and having clear cut guidelines means a franchisee is able to proceed with a resale of their franchised business with a clear understanding of what is expected of them and is more likely to result in an amicable outcome for all parties involved.

This article was written by Racha Abboud, Principal Lawyer – Commercial. 

This article was first published for www.franchisebusiness.com.au