It is not uncommon for a prospective franchisee to purchase and sign a franchise agreement before forming a limited liability company or corporations.
Again, not uncommon and it is not a big deal. However, it is important to make sure to transfer the rights and obligations under the Franchise Agreement [and to the preserve the non-compete and guaranty by individual franchisees] to the newly formed franchisee business entity. A consent to transfer agreement between the individual franchisee, newly formed business entity and the franchisor should be signed when the business entity is formed.
Yes, even though it is a transfer from a franchisee individual to a business entity that the franchisee owns, the franchisor needs to consent to the transfer. The consent to transfer conveys the rights under the franchise agreement to the business entity. Without the consent, the franchisee business entity never becomes obligated under the franchise agreement. Without the consent to transfer, the franchisee business is not obligated to pay royalties, to follow system standards, or follow any other obligations under the franchise agreement.
Yes, even though it is a transfer from a franchisee individual to a business entity that the franchisee owns, the franchisor needs to consent to the transfer.
The potential outcomes are not good. Hence the case of the In re: Meena, Inc.[i], In this case, two individuals purchased 3 franchises from GNC. The individuals later formed a corporation. A consent to transfer was never signed. The franchise agreements remained under the names of the individual franchisees. In purchasing the franchises, the individuals signed money security agreements collateralizing the franchised business assets.
The money security agreement went delinquent and unpaid after the issuance of termination notices, extensions
by the franchisor, the franchisees individually and the franchisee business
entities filed bankruptcy. The franchisor
was in a pickle. There was a money
security agreement signed by individual franchisees, but the franchisee
business entity owned the assets. The franchisee business collateral was not attachable; the assets were not owned by the individual persons
that signed the money security agreement.
The assets were owned by the franchisee
[i] Debtor. In re: Desa of NY, Inc., Debtor. In re: SDA, Inc., Debtor. In re: Choudry Sajid Javaid and Gulmeena Javaid, Debtors. ¶16,304. U.S. Bankruptcy Court, E.D. New York. Case Nos. 8-18-74693-reg, 8-18-74694-reg, 8-18-74695-reg, 8-18-74804-reg. Dated November 6, 2018.