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Selling a Franchise

Lockhart (the Franchisee) challenged GM Holden (the Franchisor) because they did not approve the sale of the franchise business to a new buyer. The facts of this case included a sale from Lockhart to another party that was refused by Holden because it was considered to have an adverse effect on Holden’s business. The Franchisor’s main concern was that there would be increased risk exposure to it because of a concentration of a large portion of its business and marketing in the hands of one franchisee.

The Franchisee had to satisfy the Court that the Franchisor’s refusal to allow the sale to another existing franchisee, on the basis that they would have too much market share, was unreasonable. The Court found that if a franchisor, in refusing consent to approve a purchaser, acts in the best interest of the continuing success of the entire franchise business, it cannot be considered unreasonable.

This case shows that a potential franchise buyer needs to satisfy preconditions to obtain the Franchisor’s approval, which may need to take into account the broader business considerations of the Franchisor.

Franchisees who are intending to sell their franchise business should request the franchisor’s policies and selection criteria before selling. Franchisors should ensure that they have clear policies and selection criteria in place to satisfy any future claims if the incoming franchisee is not approved.   This may assist in preventing any court action.

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