Transfer of the Franchised Business
A transfer of the franchised business occurs when a franchisee sells their franchise or ownership interest to a new party. Nearly all franchise relationships require franchisor approval before a transfer can occur to ensure the brand continues to be operated by qualified and financially stable owners.
Transfer requirements are disclosed in Item 17 of the Franchise Disclosure Document and within the Franchise Agreement.
Franchisor Consent
A franchisee cannot sell the business or ownership interests without written consent from the franchisor. Approval is typically conditioned on:
- Buyer meeting financial qualifications
- Buyer completing initial franchise training
- Clear background and operational capability
- Up to date compliance with standards before transfer
- Execution of the franchisor’s then current Franchise Agreement
Transfer Fees
Most Franchise Agreements require a transfer fee to cover the franchisor’s administrative work and onboarding expenses for the new owner. The fee can be:
- A flat amount listed in Item 6
- A percentage of the sale price
- Higher for multi unit transfers
Some states regulate the transfer fee amounts, requiring them to be reasonable in relation to the services provided on transfer.
Conditions Placed on Transfer
Before approving a transfer, a franchisor may require:
- Store remodels or upgrades to current brand standards
- Cure of any existing defaults
- Execution of ancillary agreements required by the system
- Renewed vendor relationships or technology upgrades
These conditions protect system consistency and improve ongoing brand performance.
Types of Transfers
- Asset sale Buyer purchases the operating assets of the franchised unit
- Ownership transfer Buyer acquires equity in the franchisee entity
- Ownership restructuring Internal change in partners or share percentages
Each structure has tax, operational, and contractual consequences.
Franchisee Exit and Release
Franchisees often seek a release from ongoing liability after selling the business. However, many Franchise Agreements include:
- Continuing personal guaranty obligations
- Liability for outstanding fees or claims
- Conditions before a final release is granted
The release terms should be negotiated early in the transaction.
Why Transfer Rules Matter
A transfer that does not follow franchise requirements can result in:
- Unauthorized operation outside franchise rights
- Termination of the Franchise Agreement
- Loss of the ability to complete the sale
- Legal disputes between buyer, seller, and franchisor
A well planned transfer helps preserve business value and goodwill.
Assistance with Franchise Transfers
Waldrop and Colvin represents both franchisors and franchisees in franchise sales and ownership transfers. We help ensure the transfer complies with the Franchise Agreement and protects your financial interests.
Contact Derek Colvin for help with franchise transfers and exit planning.
