I’m buying an existing franchise business – what are the legal documents involved?

If you’re buying an existing franchise business, you’ll likely obtain several legal documents. These documents usually comprise the franchise agreement, disclosure document, and a sale of business agreement. If the business operates from leased premises, you’ll also receive an assignment of lease or an occupation licence. But what do all these legal documents entail, and what purpose do they serve in the transaction? This article explores the various methods used to sell a franchise business and the typical legal documents used to document the transaction. We also examine how an experienced franchise lawyer can help you navigate the purchase of an existing franchise business.

Franchise Agreement and Disclosure Document

If you’re planning to operate a business as a franchisee, you’ll need to sign a contract that entitles you to do so. This contract is a franchise agreement. When a franchisee joins a franchise network, the Franchising Code mandates that franchisors must provide prescribed disclosure. This disclosure includes the disclosure document and key fact sheet, along with copies of the prescribed Information Statement and a copy of the Franchising Code itself. All of these documents must be provided at least 14 days before they are signed.

Typically, though not always, franchisors will require a party purchasing a franchise business to enter into a new franchise agreement. This means your franchise agreement may differ from the one entered into by the existing franchisee from whom you are purchasing the business. Alternatively, the existing franchise agreement may be assigned (or transferred) to you. This means the same franchise agreement continues to operate, albeit with different franchisee parties. In this scenario, a formal assignment deed is typically executed.

Regardless of which option is chosen, the franchise agreement is a crucial document that outlines your rights and obligations as a franchisee. Given the investment of time, money, and effort involved in operating a franchise business, it’s essential to have the franchise agreement reviewed by an experienced franchise lawyer to ensure its terms are clear and there are no unjust or concerning provisions. Our article here explains this process further. The disclosure document and key facts sheet are also important documents designed to provide prospective franchisees with valuable information about the franchise network. An experienced franchise lawyer can assist you in reviewing these documents and identifying any concerning provisions or further inquiries that need to be made.

The franchise agreement is entered into with the franchisor, not the party selling the franchise business. Most commonly, it is executed concurrently with the completion of the sale, documented by way of a sale of business agreement.

Sale of Business Agreement

A sale of business agreement is a legal document that outlines the terms of selling a business. In the context of selling a franchised business, this agreement typically details the business being sold, including its assets, liabilities, and any existing contracts. It also specifies the purchase price and payment terms, along with any conditions that must be met for the sale to proceed. Additionally, the agreement may address issues related to the transfer of licences, permits, employees, and franchise agreements to the new owner. Both the seller and the buyer must agree to the terms laid out in the sale of business agreement before the transaction can be completed.

In some cases, a franchisor will need to approve the terms of a proposed sale agreement before it is entered into. In almost all cases, the franchisor will need to approve the proposed purchaser.

A sale of business agreement usually sets a completion date, which is when the buyer pays the sale price and legally takes over the business from the seller. Practically speaking, the completion date for the sale agreement and the commencement date for the franchise agreement should be the same date.

Lease documents

If the existing franchisee holds the lease for the premises, most commonly there will be an assignment of that lease. An assignment of lease is a legal process where a tenant transfers their leasehold interest in a property to another party. This typically occurs when a business is sold, and the new owner wants to take over the lease agreement. For example, if a franchisee decides to sell their business, they may assign the lease to the purchaser. This means that the purchaser will step into the shoes of the original tenant. They take on the rights and responsibilities outlined in the lease agreement, such as paying rent and maintaining the property.

An assignment of lease can only occur with the consent of the lessor. The assignment should take effect from the completion date of the sale agreement. 

Alternatively, the franchisor may hold the lease. Here, the franchisor will typically grant the franchisee the right to occupy the premises via an occupation licence. In this scenario, the franchisor will typically terminate the existing occupation licence with the current franchisee, and enter into a new one with you. Again, these documents will typically take effect on the same day that the sale completes. 

How can a franchise lawyer assist in the purchase of an existing franchise business? 

An experienced franchise lawyer will play a crucial role in helping you navigate the purchase of a franchise business. They review all key documents and identify any unfair terms or red flags. They ensure that all documentation is legally compliant and cohesive. Common errors in this scenario may include: (a) a lease that doesn’t authorize the franchisor to grant occupation rights, (b) incomplete or ambiguous asset itemization in the sale agreement, (c) incomplete or non-standard provisions regarding the transfer of staff, and (d) a failure of the parties to adhere to sale conditions outlined in the franchise agreement. An experienced franchise lawyer will identify such issues, which could prevent issues arising down the track. 

Furthermore, an experienced franchise lawyer can assist with completion. All documents must be finalized concurrently. You wouldn’t want to buy a business without the right to operate because of a missing franchise agreement. Similarly, having a franchise agreement but no premises due to an improperly assigned lease is equally problematic. Completion in these cases involves various moving parts. An experienced franchise lawyer will ensure smooth progress and proper execution of all documents.

If you’re considering purchasing an existing franchise business and would like an obligation-free consultation to discuss the legal aspects of the purchase, please don’t hesitate to reach out!


Disclaimer: This article contains general information only and does not constitute legal advice. Magnolia Legal disclaims any liability arising from reliance on this article. Our terms of use apply