When dealerships are sold, many buyers assume the seller’s franchise will transfer over as part of the negotiated transactions.

In fact, when dealers talk about new acquisitions, they commonly say they are buying the seller’s franchise. That is not the case.

Franchise agreements for auto dealerships generally provide that the franchise from the auto maker may not be transferred.

Buyers may purchase assets such as furniture, fixtures and equipment. They may buy inventories, including cars and parts. They even accept some liabilities, such as the obligation to deliver ordered cars.  But the buyer is not purchasing the seller’s franchise.

A properly written buy-sell agreement should provide for the right of buyers to apply for and obtain their own dealer sales and service agreement. In return, sellers should agree to tender their resignation as franchisees at the closing transactions.

In essence, buy-sell agreements mean buyers are purchasing the sellers’ resignation as franchisees and getting the opportunity to apply for their own franchise agreement.   

Unlike a real-estate lease or a copier lease that may be assigned from the seller to the buyer at closing, the franchise agreement will not be assigned.

Instead, at closing the seller will resign its franchise (or, more properly stated, the seller’s resignation will take effect since the franchisor will generally require that the resignation be filed with the application package to take effect at closing), and the buyer will enter its own dealer sales and service agreement with the franchisor. 

That is why the buyer’s discussions and negotiations about approval with the franchisor are so important in any buy-sell transaction. Often, the buyer simply may be granted a standard franchise agreement. However, sometimes the franchisor may try to impose terms and conditions on the buyer that it might not have been able to impose on the selling dealer. 

The buyer must be prepared to negotiate with the franchisor if necessary, and must be aware of its state-law rights as it goes through that process. 

Similarly, the seller must have confidence that it is dealing with a buyer that understands what may happen in the approval process and has a plan to deal with possible roadblocks.

Rejection of the buy-sell agreement can be devastating to a seller who must start the process all over again under undesirable circumstances, such as employees likely knowing the dealership is for sale and becoming discomforted by that. 

That is why a seller must be sure it is dealing with a buyer that can be approved, and it also must candidly disclose to the buyer what it believes the franchisor may demand in concessions from the buyer to obtain approval.

A seller should be confident that the buyer knows what to expect in the approval process and is dedicated to complete it.

When the buyer and seller reach agreement on terms of sale of a dealership, the first contact following signature of the agreement should be to the franchisor to advise it of the agreement and to seek an application package for the buyer.

Buyers should prepare for an in-depth review of their qualifications, financial ability, character and the performance of other franchised stores they may own or control. They also must outline their plans for the store they want to buy. 

Buyers must work with the franchisor to obtain approval on acceptable terms to obtain their own franchise agreement.

Michael Charapp is a lawyer who represents auto dealers. He is at (703) 564-0220 or mike.charapp@cwattorneys.com.