In modern day franchising there are often situations where a franchisee, which is an individual or a franchisee, which is a corporation will wish to sell their rights under the contract to another party. A franchisor has to pay attention to these things to insure that there is no illegal or inadvertent transfer of confidential proprietary information such as secret recipes, operations manuals or marketing methods.

Indeed this stands to be reasonable to wish to monitor it, however it is not nearly as easy as it sounds as many deals, appear to be cut and dry or black and white can quickly become rather convoluted. It is so easy to accidentally allow information to slip your grasps and always difficult to control. Then there is the occasional competitor who will attempt to legally attain your secret information thru owning interests in one of your franchised outlets. How do I know, well it happened to me. So, I added this expanded clause to our franchise agreements to prevent this in the future;

5.2.4 Conditions to Transfer

In connection with any transfer provided for above (which requires Franchisee's consent), the following requirements must be met to the full satisfaction of Franchisor as a condition to any transfer:

(a) The proposed transferee or its principals must meet Franchisor's reasonable requirements for experience, net worth and character, as applied by Franchisor on a nondiscriminatory basis in selecting new Franchisees and must have or obtain before transfer all licenses required by law for operation of the Franchised Business.

(b) The proposed transferee or its designee must attend and satisfactorily complete Franchisor's initial training.

(c) The proposed transferee (and each partner, member or shareholder) must have duly executed an agreement to be bound by, and to assume and perform all the duties of the Franchisee under, the Agreement (including, in the case of such partners, members or shareholders, the covenants not to compete required by Section 3.20).

(d) All maintenance, repairs and renovations required to bring the Franchisee's premises into compliance with Franchisor's standards must have been completed. All maintenance, repairs and upgrades required to bring the Franchisee's mobile units and equipment into compliance with Franchisor's standards must have been completed.

(e) All monetary obligations of Franchisee under this Franchise Agreement are fully paid and Franchisee and each of its partners, members, shareholders, officers and directors must execute a general release of any and all claims against Franchisor and its affiliates and its predecessor, sister or co-brand companies and their shareholders, officers, directors, employees, agents and their spouses.

(f) Franchisee agrees to remain liable for all obligations to Franchisor in connection with the Franchised Business prior to the effective date of the transfer and must execute any and all instruments reasonably requested by Franchisor to evidence such liability.

(g) If the transfer results in more than a fifty percent (50%) change in the beneficial ownership of the Franchised Business, then the transferee must execute the then current form of the Franchise Agreement, except that the initial term will be the same as the remaining term of the original Franchise Agreement.

(h) The transfer fee specified in Section 2.4 must have been paid in full.

(i) Franchisee must offer the Franchised Business to Franchisor in writing for the right of first purchase. (See Section 5.5 of this Franchise Agreement.) Before the effective date of a transfer Franchisor approves:

(a) Franchisee must agree to remain bound by the covenants in this Franchise Agreement to not compete against Franchisor and to not disclose confidential information.

(b) Franchisee will pay all ascertained or liquidated debts concerning the Franchise.

(c) Franchisee may not be in default under this Franchise Agreement or any other agreement between the parties.

(d) Franchisee will pay Franchisor or a registered and approved business broker, which Franchisor may have at the time of the transfer, a ten (10) percent commission on the gross transfer price (excluding the price of real property), if Franchisor obtains the transferee for Franchisee. Any transfer by Franchisee must be approved by Franchisor in writing. The transferee must execute the standard form Franchise Agreement then being offered to new System Franchisees and such other ancillary agreements as Franchisor may require for the Franchised Business, which agreements will supersede the original Franchise Agreement in all respects and the terms of which agreements may differ from the terms of this Franchise Agreement; provided, however, that the transferee will not be required to pay the $20,000 Initial Fee and the Marketing Area provided for in this Agreement will remain the same.

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If you own a franchised outlet this is something you might consider and it would be smart to talk with an experienced franchise attorney who specializes in franchising to do an audit of how you are legally protecting your proprietary information. Remember in franchising you are forced to deal with humans and it is amazing the types of things they will do to lie, cheat and steal. So consider this in 2006.

Lance Winslow

Currently Lance is retired at age 40 and is running an Online Think Tank Forum while traveling North America. Perhaps considering something extremely challenging to do that will exercise his mind and utilize all his experiences, observations and skills. Any ideas?