Given the strength of today’s real estate market, we have observed a considerable uptick in investors buying and selling real estate brokerage in Arizona, particularly those involving a franchise model. It is estimated that the real estate brokerage industry is a $155 billion industry and growing. From Keller Williams to Help-U-Sell, investors are wanting “in” on 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 actually entering into two deals: (1) purchasing an existing business from the current owner; and (2) purchasing franchise rights from a franchisor. Franchisees are often surprised to learn of the following legal issues that can pop up in these types of transactions:
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1. Re-Imaging and Brand Obligations. A purchaser needs to understand whether the seller is in compliance with the franchisor’s brand guidelines and requirements. If the business being sold is not in compliance with the franchisor’s current brand or image requirements, the franchisor will often require that the buyer “re-image” the business to current brand standards. A purchaser must understand what is required and determine which party will bear the reimagining or brand compliance costs.
2. Transfer Process and Approvals. In most situations, the underlying franchise agreement will expressly prohibit the sale of the franchise without the franchisor’s prior written approval. Because of this restriction, the purchaser and seller should notify the franchisor of a potential sale as soon as possible. The purchaser will want the franchisor to approve the proposed transaction and will want to know whether there are any strings attached to the approval. Most franchise agreements have a process for the parties to follow for the sale of the franchise.
3. Fees. Most franchise agreements require a payment to the franchisor in order for the transfer to occur. The purchaser and seller must agree on which party will pay the transfer fee.
4. The Franchise Agreement. Most franchisors require purchasers to execute the then-current form of the franchise agreement, as opposed to allowing the purchaser to simply assume the existing franchise agreement. The purchaser will need to review both agreements and understand the differences between the two agreements. Oftentimes, the purchaser will not have much leverage to negotiate the franchise agreement, but the purchaser should understand the terms the existing franchise agreement and be aware of the new terms the purchaser must now agree to.
5. Leases and the Term of the Franchise. Oftentimes, the remaining term under the franchise agreement and the remaining term of the existing lease are inconsistent. For example, if the franchise agreement has a 10-year term, but the existing lease has just 3 years remaining, it is imperative that the purchaser obtain a lease extension to match the term of the franchise agreement.
Real estate franchises are everywhere and are a very popular way of getting into the industry. Like other franchises, a franchisor licenses the use of its name to the franchisee in exchange for a fee. That “fee” is typically a percentage of the real estate closings of the franchisee, among other fees. If you are purchasing an existing real estate franchise, you will want to consider the non-exclusive list of items noted above.
If you have any additional questions about real estate, franchises, or business law, feel free to email me at patrick@mandglawgroup.com. I look forward to hearing from you!
Patrick R. MacQueen is a founder of MacQueen & Gottlieb, PLC.
