Buying a Franchise Business: Assessing the Price of Goodwill

When buying an established franchise business, you may be paying not only for equipment and stock but also for goodwill: customer relationships, name recognition and earning power. Within a franchise network, however, some of these benefits come from the franchise concept, which you pay separately to use. Before negotiating the price, establish how much of the business’s earning power will genuinely transfer to you and what it is worth paying for.

1. Separate local goodwill from the benefits provided by the franchise network

Goodwill may arise from an established customer base, an effective team, a good location and a strong local reputation. It is not the same as the money the seller has put into the business or the years they have spent working in it. Past investment alone does not demonstrate that the buyer will receive an equivalent financial benefit.

Ask the seller to explain how the asking price is made up. The breakdown should distinguish at least between equipment, stock and goodwill. In a share purchase, you also need to examine the company’s assets, debts and other liabilities. Ask an accountant to help ensure that the same asset or benefit is not counted twice in the price.

For each justification for goodwill, ask: does the seller own this benefit, does the franchise network control it, or does it depend on an agreement with a third party? The network’s trade mark and concept are not normally assets that the local franchisee can sell. Their use depends on rights granted by the franchisor.

A well-known franchise brand can nevertheless support the earnings of the outlet you are buying. What matters is that you assess earnings after franchise fees and confirm that your right to use the brand and concept will continue. Do not justify the goodwill price solely on the strength of a familiar name if the terms for the new franchisee have yet to be agreed.

Draw up a simple breakdown: identify each benefit, the documents supporting it, how long it is expected to last and what maintaining it will cost. This moves the price discussion away from general promises and towards evidence you can verify.

2. Recalculate earnings using the buyer’s actual costs

The earnings presented by the seller may not reflect what you will be left with. Request financial statements for several financial years, along with an up-to-date profit and loss account. Look at monthly fluctuations too: a strong full-year result can conceal a long quiet period or a single exceptionally good sales period.

Work with an accountant to prepare an adjusted profit and loss account. The aim is to assess the ongoing business without one-off items and using the costs you will actually incur. Pay particular attention to:

• The owner’s work: how much does the seller work, and is the full cost of that work reflected in the earnings?
• Work done by family or others close to the seller: has the business benefited from unpaid help or labour at below-market rates?
• Exceptional income and expenses: do the figures include asset sales, one-off compensation payments or other non-recurring items?
• The buyer’s franchise terms: will ongoing fees and the cost of compulsory services be the same as for the seller?
• Maintenance: have repairs or other essential expenditure been postponed?

If you intend to do the seller’s work yourself, do not treat your own time as free. The business should pay you for your work while also allowing you to cover financing costs and earn a return for the risk you take. Otherwise, an apparent investment return may simply be payment for long working days.

Initially, keep business profitability and acquisition financing in separate calculations. Bring them together in a cash flow forecast that also accounts for tax, loan repayments and essential investment. Accounting profit alone does not tell you how much cash will be available to pay for the acquisition.

3. Check whether earning power will survive the change of ownership

For goodwill, what matters is not just past earnings but whether they can be sustained. Establish how much of the business’s sales depend on the seller’s personal relationships, specialist expertise or active presence. If customers are primarily buying from that individual, a change of ownership alone will not necessarily give the buyer the same sales.

Request a sales breakdown by customer group and establish how heavily revenue depends on major customers. At an early stage, this can often be assessed using aggregated information without disclosing personal data. The purpose is to identify dependencies, not to collect unnecessary customer information.

Check the continuity of key contracts as well. In an asset purchase, contracts generally do not transfer automatically to the buyer. Their transfer requires arrangements that comply with the contract terms and applicable law, often including the other party’s consent. In a share purchase, the contracting party remains the same, but the contract may contain a change-of-control clause.

Finland has no specific franchise law, no statutory franchise-specific disclosure document and no separate franchise register. Relevant legislation includes the Finnish Contracts Act and Competition Act, as well as EU competition rules. The Finnish Sale of Goods Act may also apply to a business acquisition, depending on what is being sold and the terms of the transaction. The Finnish Franchising Association’s Code of Ethics is a form of self-regulation, not legislation or official approval of the purchase price.

Buyers therefore have no special guarantee under franchise-specific legislation that goodwill will be preserved. Ask a lawyer to review how the seller’s financial information, key assumptions and related liabilities are recorded in the purchase agreement.

4. Set your own maximum price using a cautious forecast

Do not start with how much you can borrow. Start with a cautious estimate of how much cash the business can generate. The availability of finance does not prove that the asking price is reasonable.

Prepare a downside scenario alongside your base-case forecast. For example, vary sales levels, staffing costs and gross profit margins. Choose assumptions based on the particular risks of the business, rather than a generic percentage rule. Check whether the business could still pay you for your work, meet its ongoing commitments and service the acquisition finance.

If the asking price is based on future growth, separate earnings already achieved from the seller’s expectations. Growth may require additional work and investment from you. You should not automatically pay the seller in advance for the benefits these will generate.

Before making an offer, write down your maximum price and the key assumptions behind it. The practical takeaway: pay for goodwill only to the extent that you can substantiate its continuity and cover the price through realistic business cash flow.