Franchisors restrict transfers of their Franchisees in order to maintain control over the people who operate them. Such restrictions should apply to the franchise agreement, ownership of Franchisee and the assets of the Franchisee’s business.
Typically, the Franchisor reserves the right to approve the transferee and the terms of transfer. The right to approve the terms of transfer is important to ensure that the buyer of the Franchisee’s business does not substantially overpay for it, or accept burdensome payment terms, which could jeopardize his ability to operate the business in compliance with the terms of the franchise.
Some franchise agreements merely provide that the Franchisor will not unreasonably withhold approval of a transfer. Others specify in considerable details the criteria for approval relating to the proposed transferee and the terms of the transfer.
It is common for Franchisors to reserve a right of first refusal to buy the Franchisee’s business on the same terms as are offered by a bona fide purchaser.
Franchisors exercise this right to acquire franchised businesses as company-owned outlets and, occasionally, in lieu of denying approval of a proposed transfer when the Franchisor is unsure that it has sufficient grounds to disapprove a prospective transferee.