Franchise resales

A franchise resale is the sale of a franchise business that’s already trading, with its territory, customers and staff, from the current franchisee to a new one. It works in much the same way as any other business sale, except that there’s a third party, the franchisor, who has to approve the buyer and whose agreement controls most of what you can do.

I act for both sellers and buyers on resales. I should say that resales are the only franchise work I take on, so I don’t offer a standalone review of a franchise agreement for someone who is taking on a brand new franchise.

The franchisor’s consent

Your franchise agreement will say what happens on a sale, so it’s the first document I read. Almost all of them require the franchisor’s written consent, and many give the franchisor a right to buy the business itself on the same terms before you can sell to anyone else. Most also set conditions, which are usually that the buyer passes the franchisor’s recruitment process and completes its training, that you’re up to date with fees and not in breach, and that a transfer fee is paid (often worked out as a percentage of the price).

So before you agree a price with a buyer, it’s worth checking what the franchisor will take out of it and how long its approval normally takes. If you sell without following the process in the franchise agreement, you could find yourself in breach of it.

What the buyer signs with the franchisor

The buyer doesn’t usually step into your agreement as it stands. Franchisors commonly ask a resale buyer to sign a new franchise agreement on their current terms, which may be different from the terms you signed years ago, and to give a personal guarantee. For a buyer that means there is a second agreement to deal with alongside the purchase, usually with very little room to change anything, and I review that agreement as part of acting on the resale.

If you’re the seller, you’ll want to be released properly. If you gave a personal guarantee when you took the franchise on, it should be brought to an end at completion, and there should be a clear statement of which obligations under the old agreement (usually confidentiality and non-compete) carry on afterwards.

Shares or assets

If the franchise is run through a limited company, the sale can be of the shares, under a share purchase agreement. If you’re a sole trader, or the buyer doesn’t want the company, it’s a sale of the business and its assets under an asset purchase agreement, and the staff transfer with it under TUPE.

Who prepares the first draft varies. Some franchisors insist on their own form of sale agreement, prepared by their solicitors, which then goes to the buyer and the seller for comment and back to the franchisor for approval, and that’s how it went on a share purchase of a lawn care franchise where I acted for the buyer. Others only want to approve the deal and sign a consent, and leave the sale agreement to the two sides. I ask the franchisor which it will be at the start, because it affects the timetable.

What a buyer’s solicitor checks

The financial questions, such as whether the business is profitable, why the seller is leaving and whether there’s room to grow, are for the buyer and an accountant. The legal checks are narrower. I look at how long is left on the franchise term and whether there’s a right to renew, what exactly the territory is and whether it’s exclusive, whether there are minimum performance targets and whether the business has been meeting them, and whether the franchisor has served any breach notices. If there are premises, I check who holds the lease and whether it can be transferred, and if there are vehicles or equipment on finance, whether those agreements can move across.

Sellers should expect all of that to be asked, and it’s much easier to answer if you already have the franchise agreement, the last few years’ correspondence with the franchisor and the lease to hand.

Warranties and disclosure

Sellers in a franchise resale are often reluctant to give too many warranties, on the basis that the franchisor’s system does most of the work, but buyers should push for them and usually get them. Typically they’ll say that the accounts are accurate, the franchise agreement hasn’t been breached, the staff details are right and nothing is in dispute.

If you’re the seller, your protection is the disclosure letter, in which you set out anything that makes a warranty untrue. Due diligence (the buyer’s questions) and disclosure (your formal qualification of the warranties) are separate things, and it’s the disclosure letter that protects you from a claim. I’ve explained how it works in what is a disclosure letter?

How long it takes and what it costs

A sale usually takes two to three months, and sometimes longer. On a resale it’s the franchisor’s approval, the buyer’s training and any landlord’s consent which tend to decide how long it takes.

Resales I’ve acted on include a £95,000 gym franchise, a £160,000 franchised business and a £260,000 gardening franchise, so these are often smaller deals. I work on fixed fees, with a written scope of work agreed before I start. The fee depends on the size of the deal and how much work is involved. On a sale or purchase between £500,000 and £5m it’s usually between about 1% and 3% of the price, and the percentage falls as the deal gets bigger. Most full sales and purchases start at around £10,000 plus VAT, and franchise resales usually cost less than that, as there’s less to negotiate.

Next steps

Whether you’re buying or selling, get in touch and send me the details, including the franchise, the price, whether the franchisor knows yet, and a copy of your franchise agreement if you have it to hand. I’ll tell you how I can help and what it will cost.