Franchise and Business Sales

(Tips for Brokers)

  1. The franchisor must register in California to sell new franchises and the disclosure form (FDD) needs to be delivered to the buyer.
  2. Assume the following discussion pertains to re-sales of businesses.
  3. Why do you, as a broker, care?

I. Franchise Agreement Affects the Sale How?

a. Approval Restrictions and Qualifications of Buyer. The following often apply to the buyer:

  • Adequate experience
  • Financial condition
  • Good reputation
  • No competition with franchisor in any other business the buyer owns
  • Ability to obtain a lease

b. Right of First Refusal — Get notice out to franchisor ASAP
c. Price Limit — Franchisor may reject buyer if the purchase loan is too large.
d. Training — Must pass the training. Some buyers like to do it pre-close. Completing training can raise timing issues related to closing which, for example, might be handled as follows:

  • Pay for special training session
  • Wait until a later session with the franchisor's approval
  • Early possession
  • Others

e. Transfer Fee — Who pays?
f. New franchise agreement? New negotiation? Maybe not as good for buyer as to renewal periods, royalties, etc.
h. The existing franchisee usually has to be in good standing.

II. So What Do You Do?

a. Get the franchise agreement and read it — especially the transfer section.
b. Figure out when training is to be held.
c. Make sure the buyer has been approved as a franchisee. — NOTE: Approval of sale and approval of buyer are different.
d. Find out if a new franchise agreement is required as it may kill the deal.