WHO CAN LEGALLY
SELL A FRANCHISE?
in this article:
December 2012 - Do you need special qualifications to sell a franchise? Yes and no - Stewart Germann clarifies the laws about selling franchise opportunities
If you are selling a franchise, you have to be careful not to fall foul of the legislation contained in the Real Estate Agents Act 2008. The rules are different depending on whether you are selling a new business opportunity or an existing franchise, and what your relationship with the business is. This is something that franchisors, franchisees, consultants and agents need to understand.
Section 4 of the Act contains two definitions which cannot be ignored:
Real estate agency work or agency work:
(a) means any work done or services provided, in trade, on behalf of another person for the purpose of bringing about a transaction; and
(b) includes any work done by a branch manager or salesperson under the direction of, or on behalf of an agent to enable the agent to do the work or provide the services described in paragraph (a); but
(c) does not include –
(i) the provision of general advice or materials to assist owners to locate and negotiate with potential buyers; or
(ii) the publication of newspapers, journals, magazines, or websites that include advertisements for the sale or other disposal of any land or business; or
(iii) the broadcasting of television or radio programmes that include advertisements for the sale or other disposal of any land or business; or
(iv) the lending of money on mortgage or otherwise; or
(v) the provision of investment advice; or
(vi) the provision of conveyancing services within the meaning of the Lawyers and Conveyancers Act 2006.
Transaction means any 1 or more of the following:
(e) the sale, purchase, or other disposal or acquisition of any business (either with or without any interest in land).
So what does this actually mean for franchisors selling new businesses, or the resale of existing franchises?
If a franchisor wishes to sell a brand new franchise with no current business, then they can do so themselves without breaching the Act. The key aspect here is that the franchisor must be selling the franchise on its own behalf and not acting on behalf of someone else. If that franchisor appoints an agent (such as a broker or consultant) then the agent must be licensed under the Act as the work carried out by the agent would fall within the definition of ‘real estate agency work or agency work.’
But how do you define an agent? The Real Estate Agents Authority recently investigated an organisation that exists to promote trade between countries. In this case, an employee of the organisation had placed advertising to alert people to some master franchise opportunities she had been asked to promote. Her role was limited to attracting interest, putting the parties in touch with each other and possibly arranging meetings. There was no financial reward to her – she was merely doing her job. Nonetheless, she was investigated. It was ultimately determined that in this case there had been no breach of the Act, but it demonstrates the rigour with which possible breaches are followed up.
Placing a recruitment advert on behalf of a franchisor, or being first point of contact for potential buyers, or advising the franchisor on recruitment strategies or selection procedures, should not breach the Act. However, if someone takes a fee or commission on the successful sale of a new franchise then that surely would. In other words, if any third party is contracted to sell a business and there is a success fee by way of commission or fee then in my opinion that would be deemed to be ‘real estate agency work.’
If there is an existing franchised business and the outgoing franchisee wishes to sell it to a third party (who would be the incoming franchisee), then they can try to sell their own business by way of private sale. That should not breach the Act, because the franchisee is not going to pay a commission to himself or herself.
Equally, if a franchisor gets a general enquiry about the franchise and, instead of selling a new franchise, facilitates that person taking over an existing business by buying it direct from the franchisee, then the franchisor should not be in breach of the Act. That would be the case even if the franchisor grants a new franchise agreement to an incoming franchisee and a fee is payable, or if there is a ‘business transfer fee’ payable to the franchisor when an existing franchise changes hands, because these are standard fees not related to who has conducted the sale of the business.
However, if a franchisee asks any third party – including his or her franchisor – to sell the business in consideration of paying a success fee or commission, then the third party selling the business would be considered an agent. In this case, any advertisements in relation to advertising the specific business can only be placed by a licensed real estate agent or a licensed business broker. Section 6 of the Act states that a person must not carry out any real estate agency work unless that person is licensed. Section 7 contains an exemption for lawyers and conveyancers but there are strict rules applying.
As the above demonstrates, franchisors themselves do not generally need to be licensed as agents. It is an area, however, where non-licensed third parties (and particularly consultants) need to be very careful with how they are remunerated. In general, any form of success fee or commission may only be charged by a licensed agent.
To avoid problems and potential liability, if a franchisee or franchisor wishes to get someone else to sell a business on their behalf then they should instruct a licensed real estate agent to undertake the task. There must be transparency in relation to this matter otherwise you could run foul of the Real Estate Agents Act – and the consequences are severe.
If you breach the Act, the Real Estate Agents Authority may prosecute you and penalties may be imposed by the Court. Section 138 of the Act gives the Court the right to impose fines not exceeding $40,000 in the case of an individual and $100,000 in the case of a company. Further, in addition to any fine a person who commits an offence is liable to forfeit all money received by way of commission, profit or remuneration. That’s a big penalty, so play safe and follow the rules.
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