Given the strength of the current real estate market, we have seen a dramatic increase in the number of investors buying and selling real estate brokerage services in Arizona, especially those involving a franchise model. The real estate brokerage industry is estimated to be a $ 155 billion growing industry. From Keller Williams to Help-U-Sell, investors want to “get into” real estate, including buying their own brokerage franchises to own, manage and operate. Before signing on the dotted line, it is important for buyers to know that they are in fact entering into two transactions: (1) purchasing an existing business from the current owner; and (2) the purchase of franchise rights from a franchisor. Franchisees are often surprised to learn of the following legal issues that can arise in these types of transactions:
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1. Re-imaging and branding obligations. A buyer must understand whether the seller is in compliance with the guidelines and brand requirements of the franchisor. If the business being sold does not meet the franchisor’s current branding or image requirements, the franchisor will often require the buyer to “re-image” the business to current branding standards. A buyer needs to understand what is required and determine which party will bear the costs of re-imagining or branding compliance.
2. Transfer process and approvals. In most cases, the underlying franchise agreement will expressly prohibit the sale of the franchise without the prior written approval of the franchisor. Because of this restriction, both buyer and seller must notify the franchisor of a potential sale as soon as possible. The buyer will want the franchisor to approve the proposed transaction and will want to know if there are any conditions attached to the approval. Most franchise agreements provide a process that the parties must follow for the sale of the franchise.
3. Fresh. Most franchise agreements require payment to the franchisor for the transfer to occur. The buyer and seller must agree on who will pay the transfer costs.
4. The franchise contract. Most franchisors require buyers to perform the then-current form of the franchise agreement, rather than allowing the buyer to simply assume the existing franchise agreement. The buyer will need to review both agreements and understand the differences between the two agreements. Often times, the buyer will not have much influence in negotiating the franchise agreement, but the buyer should understand the terms of the existing franchise agreement and be aware of the new terms that the buyer must now agree to.
5. The leases and the duration of the franchise. Often times, the remaining term of the franchise agreement and the remaining term of the existing lease are incompatible. For example, if the franchise agreement has a term of 10 years, but the existing lease is only 3 years old, it is imperative that the buyer obtains a lease extension corresponding to the term of the franchise agreement.
Real estate franchises are everywhere and are a very popular way to enter the industry. Like other franchises, a franchisor authorizes the use of its name to the franchisee in exchange for a royalty. These “fees” are typically a percentage of the franchisee’s property closures, among other fees. If you are purchasing an existing real estate franchise, you will want to consider the non-exclusive list of items mentioned above.
Patrick R. MacQueen is one of the founders of MacQueen & Gottlieb, PLC.