Franchise Asset Sale Agreement

What a good one includes

• A detailed inventory of all physical assets, equipment, and inventory being transferred, along with a list of excluded personal items.
• The exact purchase price allocation, broken down by equipment, goodwill, inventory, and non-compete covenants for tax optimization purposes.
• A specific clause conditioning the entire sale on the franchisor's formal, written approval of the buyer and the transfer of the franchise agreement.
• Clear terms regarding the assumption of liabilities, explicitly stating which debts remain with the seller and which transition to the buyer.
• A non-compete and non-solicitation clause that defines the geographic boundaries and timeframe restricting the seller from opening a competing business.
• The allocation of transfer fees, specifying whether the buyer or seller is responsible for paying the franchisor's mandatory transfer fee.

Common mistakes to avoid

• Neglecting to secure the franchisor’s written consent prior to closing, which can void the entire transaction and violate the original franchise agreement.
• Failing to specify who pays the franchisor's transfer fee, leading to last-minute disputes and delayed closings at the negotiation table.
• Grouping the purchase price into a single lump sum rather than allocating it to specific assets, resulting in unfavorable tax consequences for both parties.
• Overlooking the lease assignment, which leaves the seller legally responsible for monthly rent even after the buyer takes over the physical location.

Frequently asked questions