Sometimes a franchisee (i.e. one who has purchased and runs a franchise) will desire to assign his rights in the francise to a third party (referred to as the "transferee" because the rights are being transferred to him) for either practical or personal reasons.
What Does It Mean To Assign Franchise Rights?
The actual rights that you (as a franchisee) can assign to a third party will depend on whether you have purchased an "entire business format" or a "product distribution" franchise from a franchisor. Assigning these rights to a third party means that you are agreeing to relinquish all control you have over them and transfer such control to the third party looking to purchase them.
If I Want To Assign My Franchise Rights To A Third Party, What Should I Do?
In most franchisee assignment situations, there are two things a franchisee must do before he can assign his rights to a third party:
- Give notice of the assignment the franchisor: In notifying a franchisor that you wish to assign your right, you must always identify to whom you plan to assign your rights. Franchisors will usually require that you include the name, address, financial qualifications, and business experience of the transferee so they can decide if they wish to consent to the assignment.
- Get the franchisor's consent to the assignment: Typically, franchisors have "anti-assignment" clauses in their franchise agreements that prohibit assignment of the franchise without the franchisor's consent. Courts have generally found these clauses' valid, allowing the "franchisor" to refuse consent to an assignment if they choose in many situations.
Can Franchisors Refuse Assignment Of Franchise Rights Whenever They Want?
Although most states recognize that franchisors have the right to restrict the sale or transfer of the franchise, this right is typically not absolute. The extent of this right varies depending on the state in which you live. Some of the more common restrictions placed on a franchisor's right to consent are:
- Statute of limitations: Some states require that a franchisor either refuse or give his consent within a specific period of time (usually around 60 days). If the franchisor fails to do this, then he has implicitly granted his consent.
- Franchisor must be reasonable or non-arbitrary in refusing consent: States that require this do not typically provide a definite standard by which the franchisor's consent or refusal may be judged. Such cases are generally governed by the standard assignment laws.
What Happens If I Improperly Assign My Franchisee Rights?
Failing to notify the franchisor of your assignment or doing so without his consent is ill-advised. Depending on whether the anti-assignment clause is properly constructed, a franchisor may have an action for damages or can have a court declare the assignment invalid.
Do I Need An Attorney If I Wish To Assign My Franchise Rights?
An business attorney retained for a franchisee will be able to analyze the language of an anti-assignment provision with great care in order to determine its proper effect. Additionally, an attorney experienced with contracts can inform you of the steps you must take in order to legally assign your franchise rights to a transferee. Since franchises are generally costly enterprises, it is important that you make sure that you know what you are doing before attempting to assign your rights. This will prevent a franchisor from taking action against you.