Selling a Franchise Business: Approval, Fees and Steps

Selling a franchise location follows the same steps as any small business sale, with one more party at the table: the franchisor. Your franchise agreement decides much of what you can do, so the calmest sales start by reading it and talking to the franchisor before any buyer is involved.

Start with your franchise agreement

Find the section on assignment or transfer. It usually sets out:

• Approval. That the franchisor must approve both the buyer and the transfer, and on what grounds.
• Right of first refusal. Whether the franchisor can buy the location itself on the same terms as your buyer's offer.
• Transfer fee. A fixed amount or a formula, and who pays it.
• Conditions. For example, that your royalties and supplier bills are paid up, or that the location is renovated to current standards.
• New agreement. Whether the buyer takes over your agreement or must sign the franchisor's current one.
• Term left. How many years remain and whether there's a renewal right. A short remaining term can lower what buyers will pay.

Make a short list of every condition, with dates and amounts. It becomes your plan for the sale.

Talk to the franchisor early

A quiet early conversation avoids surprises later. Ask the franchisor:

1. What their approval process involves and how long it takes.
2. The current transfer fee and any training costs for a new owner.
3. Whether any upgrades or renovations will be required before they approve a transfer.
4. Whether they know of interested buyers, such as existing franchisees who want another location.
5. Whether they plan to use any right of first refusal.

Get the answers in an email so everyone works from the same facts.

Pricing a franchise location

Buyers value a franchise on what the location earns, like any other business. Our guide to what your business is worth explains the basics. A few points are specific to franchises:

• Royalties and marketing fees are part of the costs, so they're already reflected in the profit a buyer looks at.
• Required upgrades the franchisor will ask for usually come off the price, or are paid by you before closing.
• Remaining term and renewal terms affect value, because a buyer is paying for years of operation.
• Transfer and training fees are a real cost to the deal. Decide who pays them before you agree a price.

Finding and qualifying a buyer

A franchise buyer must satisfy you and the franchisor. Before you share detailed numbers, ask buyers to sign a confidentiality agreement. Check your franchise agreement too, since it may limit what you can disclose about the system. Then check early that a serious buyer is likely to meet the franchisor's standards for experience and financing, so neither of you wastes months. Our guide to weeding out buyers may help.

The lease and other transfers

Many franchise locations have a lease, and sometimes the franchisor holds the head lease and sublets to you. Either way, the landlord or the franchisor will need to consent to the change. Our guide to the commercial lease when selling covers assignments and personal guarantees. Equipment leases, supplier accounts, licences and permits may also need to move to the buyer. See transferring contracts, licences and permits.

Disclosure rules

Alberta, British Columbia, Manitoba, New Brunswick, Ontario and Prince Edward Island have franchise laws that require a disclosure document when a franchise is sold. A sale by a franchisee for their own account is often exempt, but the exemption can depend on how involved the franchisor is in the sale. Don't assume either way. Ask your lawyer early, because getting this wrong can give a buyer the right to undo the sale later.

Closing and handover

At closing, the franchisor usually signs a consent or a new agreement with the buyer, and you may sign a release confirming you owe nothing more under your agreement. Ask for that release in writing. The buyer will normally complete the franchisor's training before taking over. Plan a short handover so staff, customers and suppliers see a smooth change.

A practical checklist

1. Read the transfer section of your franchise agreement and list every condition.
2. Bring royalties, fees and supplier accounts up to date.
3. Ask the franchisor about approval, fees, upgrades and any right of first refusal.
4. Agree a price that accounts for remaining term, upgrades and transfer costs.
5. Have buyers sign a confidentiality agreement before sharing details.
6. Check early that your buyer is likely to meet the franchisor's standards.
7. Arrange consent for the lease and other contracts.
8. Ask your lawyer about provincial disclosure rules.
9. At closing, get the franchisor's consent and a written release.

A note on advice

This guide is general information, not legal, tax or accounting advice. Franchise agreements differ a great deal, and provincial franchise laws apply alongside them. Please have a lawyer who works with franchises review your agreement and the sale documents before you sign.

See also: documents needed to sell a business and due diligence when selling.