Can I sell my franchise?

Selling a franchise isn’t as simple as selling a standalone business. Franchise agreements contain specific rules, approvals and fees that you need to navigate carefully.

Here, leading franchising experts explain what franchisees need to know, from the basics of selling to more complex valuation and legal considerations.

As a franchisee, can I sell my franchise at any time?

Franchising agreements generally do not allow voluntary early termination. If things aren’t working out the way you expected and you want out, Shelley Nadler, legal director at Bird & Bird, advises seeking to sell your business.

“If you decide to leave the franchise before the end of the term without selling the business, the franchisor can claim for any loss of income that it may suffer as a result.”

Brian Duckett, former chairman of The Franchising Centre, adds that selling isn’t always a sign of failure. “You can also sell your franchise if things work out as well as, or even better than, expected. This means you could make a considerable capital gain on your investment.”

Vicky Wilkes, head of legal at Aston Villa Football Club, explains that the right to sell your franchise is usually conditional. Your franchise agreement is “likely to contain numerous conditions that you must meet before any sale of the franchise business can go ahead.”

These conditions often include:

● providing the franchisor with details of the proposed buyer

● ensuring the buyer meets the franchisor’s standards

● paying approval costs

● possibly paying an introduction fee if the franchisor introduced the buyer

● the franchisor having first right of refusal on the sale

● the term for the incoming franchisee being only the remainder of the outgoing franchisee’s term

Selling before the end of the agreement

In theory, a franchisee can sell their business at any point during the term of the franchise agreement. However, as Shelley Nadler points out, if you try to sell near the end of the term of the franchise agreement, “the value of the business can diminish proportionately.”

It’s crucial to sell your franchise while the agreement is still in force. Nadler clarifies: “If you sell your franchise business during the term you will be able to sell it as a going concern with the rights to operate the franchise.”

Selling after the franchise term expires leaves the franchisee with only the physical assets of the business, without the rights to operate under the franchise brand.

Can I only sell my franchise to a buyer approved by the franchisor?

Yes. Approval is essential. Nadler explains: “It’s usual for the franchisor to demand the same qualifications and standards for acceptance of a purchaser of a franchisee’s business as applied to direct applicants.”

Franchisors typically assess the buyer’s financial resources, business experience, compatibility with the franchisor’s culture and other key skills. The franchise agreement will outline the approval process and criteria.

What is a ‘transfer fee’?

Franchisors charge a transfer fee to reflect the fact that they will have to provide training and other services to the new buyer.

John Pratt, senior partner at Hamilton Pratt, explains: “Franchisors often have a databank of prospective purchasers. They act as business transfer agents for their franchisees’ businesses.

“In relation to ‘checking out’ an incoming franchisee, they usually charge a fee of between £500-£1,000. In relation to training and other administrative costs, most franchisors charge a percentage of whatever their then-current initial fee might be. This is usually 50-60 per cent.

“For acting as a business transfer agent, franchisors normally charge 5-10 per cent of the sale price of the business.”

Vicky Wilkes adds: “The franchise agreement will set out the level of the fee and the restrictions on the franchisee’s rights to sell the business or shares. ”

How is a franchise business valued when it’s put up for sale?

Valuing a franchise can be complex. Brian Duckett explains: “One thing you can be sure of is that the seller and the potential buyer will value it differently. It will then be differently valued again by a resale broker, an accountant, an independent valuer and even the franchisor.”

Resale valuation usually considers:

● Fixed assets – valued at current worth, factoring in depreciation and usability.

● Current assets – such as stock, adjusted for unsaleable items.

● Goodwill – representing the established reputation and customer base of the business.

Vicky Wilkes adds: “A franchisee should expect to be compensated for the value it has added to the franchise business on any sale. You could view the franchisee’s goodwill as the difference in value between a new franchise and an existing franchise business.”

Will a franchisor help me get the best price for my franchise?

While franchisors want their networks to thrive, their primary interest is not to maximise the sale price for an outgoing franchisee.

John Pratt explains: “A franchisor’s commercial interest lies in ensuring an incoming franchisee pays as little as possible for the franchise. Otherwise, it may be burdened with high debts that would need to be paid off. This would potentially reduce the profitability of the franchise.”

He continues: “Franchisors sometimes ensure that franchise agreements contain provisions to the effect that they can discuss the purchase price payable by an incoming franchisee to ensure they don’t pay too much.

“A small number of franchisors go even further. They set a formula for the calculation of the sale price of a franchise to ensure a relatively low payment is made for the business.”

What non-competition restrictions apply after selling my franchise?

Shelley Nadler explains: “It’s usually the case that a franchise agreement will contain provisions that prevent the outgoing franchisee from trading with the customers of the franchisee’s business and from carrying on competing business within the territory in which the franchisee’s business was operated.”

Typical restrictions include:

● Not competing in the former franchise territory for a period (often one year).

● Not soliciting former customers for a set period.

● Respecting the franchisor’s confidential information and goodwill.

Selling a franchise is a structured process with legal, financial, and operational considerations. Understanding franchise agreements, approval processes, fees, valuations and restrictions is essential for both sellers and buyers.

Consulting professional advisers, ideally with experience in franchise law, is crucial to ensure a smooth transaction.