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Legal strategy selling franchise assets restricted by franchisor

RainbakerRainbaker subscriber Posts: 1 Member
Hello, I own a US based home services franchise business that I am considering exiting. The revenues are ~$900k annually but the owners discretionary income is likely <$50k, still sharpening the pencil on that.

In order to have the most flexibility and sell to the widest audience, I'd like to have the option to sell the business assets: clients,employees&prospects, without selling the franchise rights themselves. One can operate this business without much operationally from the franchisor. Although I am struggling to determine where it does, I am told that my Franchise Disclosure Document restricts me selling my clients with the franchisor approval.
>> My first question is how would they enforce this? If I sell the assets to another company - I assume the only thing they could try and do is sue me? If the business isn't worth that much I doubt they would pursue.
>> My second question is - I wonder if a way around this restriction is to "give away" my assets for some some years-away option in the purchasing entity - say options to purchase equity some time away. I don't need to nor expect to make much money off the business sale, so picking up some potential future equity has upside.


  • Options
    PZagottiPZagotti subscriber Posts: 23 Bronze Level Member

    Hi Rainbaker,

    A common definition of ethics is doing the right thing even when you feel confident you will never get caught doing the wrong thing.  The simple fact that you know you will breach the contract by selling equipment and client / employee / prospect info in itself should make you think twice just for ethical reasons alone.

    Now legally a few things can happen.

    1. The franchisor could sue the company you sold the client / employee / prospect info to.  In the process that company you sold that data too will probably implead / bring you into the suit, (both the company and you personally) and seek contributions from you for legal cost and damages.

    2.  The franchisor could sue your company and you personally for breaking the franchise agreement.  While you may not currently have anything at the moment, depending on the state you are in, they can sell the judgment to a collections company who will garnish your wages which means you employer / future employer could receive information put you in a tough spot.

    3  Your client / employee / prospect could sue you too depending on any confidentiality agreement.  Peoples data privacy is a big issues and depending on the circumstances the people in question could sue the franchisor, franchise and you personally. 

    As for giving the equipment away as a way around the sales restriction, the court could easily find the substance over form resulting in some kind of present or future gain and treat the "gift" as a sell.  

    In your question you stated that the info and equipment is not worth much.  If that is the case then taking the risk is probably not worth the small amount of money you might receive.

    One last thought, it might be worth you purchasing an hour or two from an attorney in your local community to guide you on this.   

    Phillip Zagotti
    Zagotti & Burdette CPA, LLC
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