Sell Your Franchise Business: Transfer Terms, Approval, and Value

Start with your franchise agreement and Item 17

Your franchise agreement contains a section on assignment or transfer. It governs what happens when you sell the franchise, sell the business assets, or sell a controlling interest in the entity that holds the franchise. Most agreements treat all three as a transfer that needs the franchisor's consent.

Item 17 of the Franchise Disclosure Document summarizes those terms in a table: the conditions for franchisor approval of a transfer, any right of first refusal, and your obligations after the franchise ends, including any noncompete. Item 6 lists the transfer fee. If you no longer have the FDD you received when you bought, ask the franchisor for its current FDD, and rely on your signed agreement for the terms that bind you.

Read both before you talk to a buyer. Sellers who start marketing first sometimes learn that the franchisor requires notice before marketing, restricts how the unit can be advertised, or has conditions the expected buyer cannot meet.

How to sell a franchise business, step by step

The steps below describe how to sell a franchise business in the order most franchise resales follow. Your agreement and your franchisor's transfer process may add steps or change the order.

1. 01

   Read your agreement and Item 17

   Start with the transfer section of your franchise agreement and the Item 17 table in the FDD you received when you bought. Note the conditions for transfer, the notice you must give, any right of first refusal, and the transfer fee. If your agreement has been amended or renewed, the current version controls.

2. 02

   Get your records in order

   Assemble several years of financial statements and tax returns for the unit, the royalty and brand fund reports you have filed with the franchisor, your lease, equipment lists, and staffing records. Confirm you are current on royalties and in compliance with brand standards, because defaults usually must be cured before the franchisor will approve a sale.

3. 03

   Talk to your franchisor

   Most franchise agreements require notice to the franchisor before or when you begin marketing the unit, and many franchisors have a written transfer process with forms, a fee, and a contact. Some will tell you the current buyer qualification criteria and the remodel or upgrade obligations a buyer will face. Ask for these in writing.

4. 04

   Value the unit

   A franchise unit is valued on its earnings like any business, adjusted for the terms that come with it: remaining term, renewal rights, territory, and royalty load. These are covered below.

5. 05

   Market to qualified buyers confidentially

   Buyers sign a nondisclosure agreement before they receive the unit name or financials. Screening buyers early against the franchisor qualification criteria saves time, because a buyer the franchisor will not approve cannot close.

6. 06

   Accept an offer and submit the transfer application

   Once you have a signed letter of intent, the buyer applies to the franchisor. The franchisor reviews the buyer, and if it holds a right of first refusal, decides whether to exercise it. Financing, due diligence, and lease assignment run alongside this review.

7. 07

   Close and complete the handoff

   At closing the buyer signs the franchisor documents required for the transfer, you sign the purchase agreement and usually a general release, the transfer fee is paid, and the new owner completes or schedules required training.

Franchisor approval and common transfer conditions

Franchisors approve transfers because the buyer will operate under their brand for years. Some agreements say consent will not be unreasonably withheld if stated conditions are met, and others give the franchisor more discretion. The conditions below appear in many franchise agreements. Yours may include some, all, or others.

Some agreements add further conditions, such as the seller remaining liable on certain obligations, the buyer assuming the lease, or the seller agreeing to a noncompete after closing. Read the whole section, not only the Item 17 summary.

The right of first refusal

Many franchise agreements give the franchisor a right of first refusal. When you receive a bona fide offer you intend to accept, you must give the franchisor notice and a copy of the offer, and the franchisor has a set period to elect to buy the unit on the same terms. If it declines or the period expires, you may proceed with your buyer, usually only on the terms you disclosed.

The right affects how you deal with buyers. Some buyers are reluctant to invest in due diligence when the franchisor could step in. Tell buyers about the right early, follow the notice procedure in your agreement exactly, and build the response period into your expected timeline. Item 17 tells you whether your franchisor holds this right.

Transfer fees

Franchisors charge a fee to process a transfer, covering their review of the buyer and the cost of training the new owner. The amount varies widely by system. Some charge a flat fee, some charge a percentage of the initial franchise fee then in effect, and some charge less for transfers to existing franchisees, family members, or an entity the seller controls.

The transfer fee is disclosed in Item 6 of the FDD and stated in your franchise agreement. The agreement may say who pays it; if it does not, it is a point to negotiate with the buyer. Budget separately for any remodel costs, legal fees, and the cost of curing defaults.

What the franchisor requires of the new owner

The franchisor reviews the buyer much as it would review a new franchisee. Expect it to request a personal financial statement, proof of liquid capital, credit and background checks, a resume, and often an interview or a visit to headquarters. A buyer who does not meet the criteria will not be approved, regardless of the price offered, so screen buyers against those criteria before you accept an offer.

Where the franchisor requires it, the buyer receives the franchisor's current Franchise Disclosure Document before signing the franchisor's documents. That gives the buyer the franchisor's current fees, litigation history, outlet data, and financial statements. The buyer will also complete the franchisor's required training, and the closing date often depends on when a training class is available.

For a buyer's view of the process, our page on franchise buyer consulting covers how buyers read an FDD and validate a brand.

How a franchise unit is valued

A franchise unit is valued on the same foundation as any small business: the earnings it produces for an owner, usually measured after adding back owner compensation and one time expenses, and the risk that those earnings will continue. Our valuation page explains the methods. Any opinion of value from Forge is a broker opinion of value. It is not a certified appraisal, and a lender may order its own.

Franchise terms change the picture in ways an independent business does not face:

• Remaining term. A buyer is buying the years left on the franchise. A unit near the end of its term carries more uncertainty unless the buyer signs a new agreement at transfer.
• Renewal rights. The conditions for renewal, the renewal fee, and any requirement to sign the then current agreement affect how a buyer views the long term.
• Territory. A protected territory with room to grow is worth more to a buyer than an unprotected one where the franchisor can place another unit nearby.
• Royalty and fee load. Royalties, brand fund contributions, and technology fees come out of every sale. If the buyer must sign a then current agreement with higher fees, the buyer will value the unit on those fees, not yours.
• Required capital at transfer. A remodel or upgrade the buyer must fund reduces what the buyer can pay you.

Timing depends on the franchisor's process

A franchise resale has every step of an independent sale plus the franchisor's review. How long that review takes depends on the franchisor: how quickly it processes applications, whether it exercises or waives a right of first refusal, when the next training class runs, and whether a remodel must be done before closing. We give a typical range for a specific sale once we know your franchisor's transfer requirements, and we do not promise a closing date.

Starting with the agreement, curing any defaults early, and screening buyers against the franchisor's criteria are the parts of the timeline you control.