Selling a Franchise and Getting the Franchisor's Approval
How a franchise resale works, what the franchisor can require, how long approval takes, and what an owner should check before listing a franchised unit.
Words by
Matan Michael
You can sell a franchised location, but you cannot sell it the way an independent owner sells a business. The franchise agreement you signed years ago says who must approve a buyer, what fees you owe, and sometimes who gets the first chance to buy. Owners often read that document closely once, at signing, and never again. The time to read it again is before you speak to anyone about a sale.
The agreement is the starting point
Pull out the franchise agreement and find the section on transfer. Most agreements have one, and the language is usually more detailed than people expect. It will say whether you need the franchisor's written consent to sell, what the franchisor looks for in a buyer, how many days the franchisor has to respond, and what you must pay. Some agreements also say that the franchisor can step in and take the deal on the same terms, a right of first refusal, and that right changes how a buyer feels about spending time and money on due diligence.
Read the definition of a transfer too. In some agreements it covers a sale of the assets, a sale of ownership interests in your company, and a change in who controls the entity. If you were planning to bring in a partner first and sell the rest later, you may find that the first step already counts as a transfer and needs approval.
Look for the term remaining. A buyer is purchasing the right to operate under the brand for the years left on the agreement, and then usually the right to renew if they qualify. A unit with three years left on its term is worth less than one with twelve, in the same way a short lease lowers value. In many systems the buyer signs the franchisor's current form of agreement rather than taking over yours, which may mean different royalties, a new remodel requirement and a new term. That is something a buyer needs to know before they bid, and often it is not known until the franchisor says so.
Rules for resales, disclosure and franchise relationships differ by state, and your attorney confirms what applies to you.
What the franchisor looks at
Franchisors approve transfers because their brand depends on who runs the units. They will usually look at a buyer in much the way a lender does. Does the buyer have the capital to buy the unit and to reinvest in it? Do they have business experience, and do they have operating experience in the field? Will they work in the business or hire a manager? Do they have a clean credit and background history? Many require the buyer to complete the same training a new franchisee completes, and some require a period of working in a unit before the closing.
The franchisor will also look at you. Expect them to check that you are current on royalties, advertising fund payments, and technology fees, and that you have no uncured defaults. Open items are the most common reason for delay. If a required remodel is overdue, or a recent inspection found problems, the franchisor may make approval conditional on fixing them, either by you before closing or by the buyer afterward. Neither choice is free.
Some systems have a short list of approved buyer types and prefer existing franchisees who want to add units. That can be good for you, since a multi-unit operator already knows the system. It can also narrow the field if the franchisor tells you the territory has to go to a current operator. Ask about this early, because it affects whether you should market the unit broadly at all.
Fees and conditions to expect
The transfer fee is usually stated in the agreement, and it can be a fixed sum or a share of the current initial franchise fee. Training fees for the buyer may be separate. Some franchisors charge for legal review, and some require you to sign a release of claims against them as a condition of consenting. A release is a request to give up rights, so have your attorney read it before you agree.
The franchisor may require you to stay bound by your non-compete and confidentiality obligations after the sale, which is normal. They may also require that the buyer's financing arrangements fit within the system's limits. Seller financing in a franchise sale needs a closer look than usual because the franchisor may have to approve it, or may restrict it, or may require that the note be subordinate to the franchisor's own claims. If you were counting on carrying a note, ask. Our post on seller financing describes the terms, and the franchisor's rules sit on top of them.
Think about the lease as well. Many franchise leases are signed with the franchisor's collateral assignment or require the franchisor's consent to assign. The landlord and the franchisor both need to be satisfied, and they do not coordinate with each other. You can read about the landlord's side in the lease is part of the deal.
How long approval takes and where it stalls
The agreement may give the franchisor thirty days or sixty to respond, and the clock often starts only when the franchisor receives a complete package. A package typically includes the buyer's application, financial statements, a personal net worth statement, the purchase agreement or a signed letter of intent, and your own current documents. If any piece is missing, the clock does not start. Owners lose weeks this way.
Approval also moves at the pace of a franchisor employee who handles transfers for the whole region. That person may be handling dozens of files, and the buyer's file competes with the rest. The best way to speed it up is to send a complete package the first time, ask who the contact is, and follow up politely every week or so. Do not threaten. The franchisor has no obligation to rush and plenty of ways to be slow.
Most deals stall for one of three reasons. The buyer fails the franchisor's financial or experience test and nobody found out until the application was in. The seller is in default on something small that nobody remembered. Or the franchisor decides to exercise a right of first refusal, or to use the transfer to require upgrades that make the deal uneconomic for the buyer. You can head off the first by pre-screening buyers, which is part of what we do on every sale, and the second by asking the franchisor for a statement of account before you list.
Marketing a franchised unit without causing trouble
You usually cannot market a franchise as freely as an independent business. Some agreements limit how you use the brand's name and logo in advertising a sale, and some say the franchisor must approve the marketing. Others are silent. A confidential listing that does not name the brand is generally safer, and buyers can learn the brand after signing a nondisclosure agreement. Our post on how we market a business confidentially describes the process.
Confidentiality has a particular edge here. Staff, customers and neighboring units may talk to the franchisor, and the franchisor may hear about your plans from a source other than you. It is generally better to call the franchise representative yourself once you have a serious buyer, so that the first conversation is an organized one. Some owners tell the franchisor at the start of the process and ask for their guidance, and in a cooperative system that can work well. In other systems, the less said before there is a buyer, the better.
Valuing a franchised business
A buyer prices a franchise unit by what it earns after royalties and fees, which is why your financials must show those costs clearly. The brand has value of its own, since customers walk in already knowing the name. The same brand also takes a share of revenue every month, restricts what you can sell and where you can buy it, and sets the schedule for upgrades. Buyers weigh those together. A strong, growing brand with a fair royalty and a territory with room supports a good price. A brand with falling same-store sales, unhappy franchisees or a pending refresh that costs a lot of money does not.
Ask the franchisor about the upcoming remodel schedule, the pending changes to royalty structures, and the plans for the brand. You are entitled to ask, and the buyer will. The disclosure document the franchisor gives new buyers will answer many of these questions, and buyers read it carefully. If you have never seen the current version, ask to.
The guide on how much your business is worth covers the general valuation method. For a franchise, add to it the remaining term, the cost of any required capital work, and any restrictions on resale.
Things to do before you call anyone
Find your franchise agreement and every amendment, and mark the transfer provisions. Request a statement of your account with the franchisor and confirm nothing is open. Check your remaining term and renewal rights. Ask your attorney whether a right of first refusal applies and what the process is. Collect the paperwork for your lease, your equipment and your employee records, since the franchisor will want some of it. Then talk to us about whether the unit is worth taking to market now or in a few months after you fix what the franchisor would have flagged. A short delay used to correct a default usually shortens the whole sale.
