Selling a franchised business

Anchored to
18.0% of financed acquisitions carry a franchise name

How common it is

18.0% of the 40,612 financed acquisitions in this file carry a franchise name, which makes franchise resale one of the largest single categories of small business transfer in the country. It is concentrated in food service, accommodation and personal services, and the pattern is visible on the sector pages.

The franchisor approves the buyer

The defining feature of a franchise resale is that the parties cannot complete it alone. The franchise agreement will require the franchisor's consent to a transfer, and that consent is usually conditional: the buyer must meet the franchisor's current financial and experience criteria, complete training, and sign the franchisor's current agreement rather than assume the seller's.

There is often a transfer fee, and in many systems a right of first refusal allowing the franchisor to step into the buyer's place on the same terms. A seller who discovers that right after agreeing a deal has wasted months.

The practical effect is a third approval process running alongside the buyer's diligence and the lender's credit process, controlled by a party with no obligation to move at anyone else's pace.

The agreement the buyer inherits

Because the buyer typically signs the current form rather than inheriting the seller's terms, the deal being bought may differ from the one being sold. Royalty and marketing contributions may be higher than the seller has been paying. The new term may be shorter or longer. Territory definitions may have changed.

Required refurbishment is the item that most often surprises both sides. Many systems require a unit to be brought to current specification on transfer, and that is a capital cost landing on the buyer immediately after closing. A buyer who learns of it late will seek to recover it from the price, and they will usually be right to.

Running the process

Three things shorten a franchise resale considerably. Read the transfer provisions before marketing, so the criteria, the fees and any right of first refusal are known rather than discovered. Contact the franchisor early, because most maintain a transfer process and some maintain a list of approved candidates already looking. And qualify buyers against the franchisor's stated criteria before granting exclusivity, since a buyer the system will not approve cannot complete however good their offer is.

Franchised units also tend to attract lenders familiar with the specific brand, because a system with a long operating history gives a credit team something to underwrite against. Where a buyer proposes a lender with no experience of the brand, expect the process to run longer.