Caps and Baskets: How Buyers and Sellers Negotiate Risk in a Business Sale
A beautifully drafted set of seller promises is worth very little if the cap is too low to recover under or the basket is structured so you can never reach it. This…
A franchise resale is the purchase of an existing franchised location from the franchisee who owns it. It is a business acquisition with a third party in the middle: the franchisor, which must approve the buyer and controls many of the terms.
The buyer gets an operating location with customers, staff and a sales history, but the timeline and part of the cost depend on the franchisor's transfer rules. We represent buyers and sellers in these deals, with the same diligence and closing work as any business purchase.
What Changes When the Business Is a Franchise
Franchisor Approval
The franchisor must approve the buyer, and its conditions become conditions of the deal.
A New Franchise Agreement
The buyer usually signs the franchisor's current form, which can differ from the seller's.
Fees, Training and Timing
Transfer fees, training and any remodel are scheduled and allocated before closing.
The Seller's Exit
Releases from the seller's franchise guaranty, lease guaranty and continuing obligations.
What the Franchisor Usually Requires
Buyer Qualifications
Financial statements, background checks and often an interview.
A New Franchise Agreement
The buyer typically signs the franchisor's current form, sometimes with higher royalties, new fees or a remodel requirement.
Training
The buyer completes the franchisor's program, usually before it may operate, which can set the earliest closing date.
A Clean Account
The seller is current on royalties and fees, any defaults are cured and the transfer fee is paid.
Right of First Refusal
Many agreements let the franchisor buy the location on the buyer's terms, so the buyer needs the waiver in writing.
Seller's Release
The seller signs a general release of claims against the franchisor.
We review the buyer's new agreement against the deal's numbers, because a higher royalty or a required remodel changes what the location is worth. Our FDD and franchise agreement review and franchise law pages cover those documents in more depth.
The Lease and the Seller's Exit
Most franchised locations are leased, and the lease often carries a rider giving the franchisor rights in the space, such as taking over the lease if the franchise ends. The landlord's consent, any guaranty the landlord wants from the buyer and the franchisor's lease requirements all have to line up before closing. When the buyer is using an SBA loan, the lender also checks the brand against the SBA Franchise Directory, which SBA lenders use to evaluate eligibility.
For the seller, the goal is a clean exit: a written release of its personal guaranty of the franchise agreement, a release or replacement of any lease guaranty, and clear terms on the post-sale non-compete. These points are easier to settle while the franchisor and landlord are still reviewing the transfer.
How a Franchise Resale Moves
Letter of Intent
Price, the split of franchisor costs and a timeline built around approval are agreed.
Transfer Application
The buyer applies to the franchisor with its financial and background information.
Diligence and Documents
We review the business, the lease and the buyer's new franchise agreement, and draft the purchase agreement.
Approval and Training
The franchisor approves the transfer, waives any right of first refusal and trains the buyer.
Closing Day
The purchase closes, the buyer signs its franchise agreement and the transfer fee is paid.
Frequently Asked Questions
Have a question that isn't answered here? Call us at (817) 631-8842 or send a message.
Ask a QuestionWill I receive an FDD when buying an existing franchise location?
Not always. Under the FTC Franchise Rule, a franchisee's sale of its own location isn't a franchise sale if the franchisor has no significant involvement with the buyer, and approving the transfer doesn't count on its own. A franchisor that does more, such as giving the buyer financial performance information, must provide its FDD, and the rule's exemptions can remove the requirement in other cases. Either way, ask for the current FDD.
Can the franchisor block the sale?
In most systems, yes. Franchise agreements typically require the franchisor's written approval of a transfer, set conditions for it and often give the franchisor a right of first refusal. Item 17 of the franchisor's FDD summarizes those conditions, and the purchase agreement should let either side end the deal if approval doesn't come by a set date.
Who pays the franchise transfer fee?
The franchise agreement usually sets the amount, and the FDD lists it among the franchisor's fees. Who pays is negotiable: the buyer, the seller or both. We settle it in the letter of intent, along with training costs and any required remodel.
How long does a franchise resale take?
The franchisor's process usually sets the pace. The application review, the buyer's training, the landlord's consent and any lender approval all have to finish before closing, so the target closing date should follow the franchisor's calendar.
More in Business Acquisitions
- Mergers and AcquisitionsBuyer and seller representation in Main Street and lower middle market deals.Learn More
- Buying a BusinessStructure, diligence, negotiation and closing for buyers.Learn More
- Selling a BusinessPreparation, negotiation and closing for owners selling their companies.Learn More
- Asset PurchasesBuying or selling a company's assets while the seller keeps the entity.Learn More
- Stock PurchasesBuying a corporation's shares, with its contracts and its history intact.Learn More
- Membership Interest PurchasesBuying an LLC's ownership under a membership interest purchase agreement.Learn More
- Partner BuyoutsBuying out a co-owner, or selling your stake, on clear terms.Learn More
- SBA-Financed AcquisitionsPurchase agreements and closings built around SBA 7(a) lender requirements.Learn More
- Seller FinancingSeller notes with clear payment terms, security and remedies for both sides.Learn More
- Earn-OutsContingent price terms defined clearly enough to measure, report and pay.Learn More
- Rollover EquitySellers reinvesting in the buyer, on terms that protect the stake they keep.Learn More
- Selling to Private EquityRepresenting owners who sell to private equity firms and PE-backed platforms.Learn More
- Search Funds and SponsorsVehicles, investor terms and acquisitions for searchers and independent sponsors.Learn More
- Letters of IntentSetting the price, structure and key protections before the deal is drafted.Learn More
- Due DiligenceFinding the legal issues in a business before the buyer owns them.Learn More
- Purchase AgreementsThe negotiated terms that decide who carries the risk in a business sale.Learn More
- Closing an AcquisitionChecklists, payoffs, funds flow and the follow-up that finishes a deal.Learn More
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