I'm in the process of selling my fitness franchise location (part of a national chain). Several of my customers have prepaid annual memberships, and I'm getting mixed messages from my broker and the franchisor about what happens to those contracts at closing. Do they automatically transfer to the buyer? Am I on the hook for refunds if the buyer changes terms? Would love to hear from anyone who's been through this.
Franchise Sale
What happens to customer memberships when a franchise location is sold?
Not a franchise guy but I bought an independent gym years ago. Prepaid memberships were a nightmare. Half the files were on paper. Good luck.
Honestly this is a question for a franchise attorneyy, not a forum. The answer depends entirely on your franchise agreement and the asset purchase agreement. Most franchise systems have language that requires the buyer to honor existing member contracts for the remainder of their term — but 'most' isn't 'all.'
^^ this this guy gets it
Appreciate the reality check. I do have an attorney involved, but we're early in the process. Mostly trying to understand what's standard so I know what to push for in the the APA.
Worked at a franchise corporate office for a few years. From what I saw, the franchisor usually cares more about the royalty stream continuing than the individual members. If the new owner takes over the location, they typically have to assume the existing contracts., But if the buyer is purchasing assets only and not the entity, there can be gaps.
Also worth checking your state's consumer protection rules on prepaid memberships. Some states require a bond or escrow for prepaid contracts, and those obligations follow the business, not the owner.
lol @ 'mixed messges from my broker and the franchisor.' welcome to franchising.
I sold my franchise (not fitness, but a service franchise with recurring contracts) two years ago. The buyer had to honor all existing agreements, and the franchisor required proof of that in the transfer approval package. The ugly part was the the buyer renegotiated renewal terms six months later, and a bunch of customers blamed me. So be prepraed for that.
That's a good point about reputational fallout. Even if you're legally clear, customers don't read the APA.
Did the franchisor at least back you up when customers complained?
Ha. No. Corporate sent a form letter and stopped returning my calls. Once the transfer fee cleared, I was yesterday's news.
That reputational piece is what worries me most. Thanks for the input, everyone. It sounds like I need to push for explicit language in the APA requiring the buyer to honor all prepaid memberships through their full term, and maybe get the franchisor to put that in writing as part of the transfer approval.