Buying a franchise: make sure you can sell your business later

When buying a franchise, it is worth thinking ahead to the day you want to sell your business. The profitable operation you build may not be easy to transfer to a new owner if the franchise agreement leaves buyer approval or transfer costs unclear. A franchise network needs to balance continuity with franchisees’ ability to sell up. Establish the rules for selling before you commit, even if you plan to run the business for many years.

1. Establish what you will be able to sell

Owning a business and having the right to transfer a franchise agreement are two different things. You may own the shares in your company, its equipment and other business assets, but your right to use the network’s branding and operating model is contractual. Those rights are not assets you can freely sell.

Ask the franchisor to confirm in writing how the agreement deals with both a sale of the business and a transfer of shares in your company. In a business asset sale, transferring the franchise agreement generally requires the franchisor’s consent. In a share sale, the same company remains party to the agreement, but a change-of-ownership clause may still require prior approval.

Also check whether restrictions extend to selling a minority stake, bringing in a new shareholder or transferring ownership to a family member. Otherwise, a routine ownership arrangement could turn out to be a change requiring consent under the agreement.

Alongside the agreement, ask to see any transfer guidelines and fee schedule. If the guidelines set out material conditions for a sale, establish whether the franchisor can change them unilaterally. Your ability to sell your business should not rest on a verbal assurance that a suitable successor will be approved.

2. Agree on the buyer approval process

The franchisor has a legitimate need to check a new franchisee’s skills, funding and suitability for the network’s operating model. For a prospective buyer, however, a process with no clear approval criteria or decision timetable is problematic. Uncertainty can put off an otherwise suitable successor.

Negotiate a clear process in the agreement or an appendix. It should answer at least the following questions:

• What experience, funding and training requirements must the buyer meet?
• Which documents must be submitted for approval, and to whom?
• How long does the franchisor have to flag missing information and reach a decision?
• Will the seller receive written reasons if approval is refused?
• Can approval be given conditionally, for example subject to completion of training?

Do not assume that silence from the franchisor means approval. If missing a deadline is to have a particular consequence, this must be expressly agreed. Have a lawyer review any such clause.

At the same time, establish how you can look for a buyer without disclosing the network’s confidential materials too early. A practical approach is staged disclosure: start with an overview of the business for sale, then provide more detailed information once a confidentiality agreement has been signed. The franchisor should explain which of its materials you may show to a prospective buyer.

Also ask for an account of previous changes of ownership, without personal data or trade secrets. Past practice can help you assess how well the process works, but it is no substitute for rights written into your own agreement.

3. Calculate what you will actually receive from a sale

The sale price of a business is not the same as the amount the seller keeps. A franchise agreement may involve a transfer fee, a charge for training the buyer or a requirement to refurbish the premises when ownership changes. For each item, establish who pays, how the amount is calculated and when payment is due.

Ask the franchisor to distinguish between the seller’s obligations and the new franchisee’s joining costs. Even if a fee is charged to the buyer, it may reduce what they can afford to pay for your business. The same applies to any equipment upgrades or changes to the premises’ appearance required immediately.

Prepare an initial sale calculation showing the estimated sale price, franchise fees payable by the seller, any refurbishment or upgrade costs, professional fees and taxes as separate items. Consider debt repayments separately, according to the structure of the sale. Treat this calculation not as a promise of future value, but as a way to identify terms that could erode the financial benefit of selling.

Also establish whether the buyer will take over the existing agreement for its remaining term or sign a new one. A short remaining term or substantially different terms may affect the buyer’s ability to secure finance and willingness to pay. Ask the franchisor to specify when the terms applicable to the buyer will be made available for review.

If the franchisor has a right of first refusal or a buyout right, check what triggers it, the relevant deadlines and how the price is determined. A right to buy the business at a price offered by a third party is different from a right to acquire assets at a predetermined valuation. An unclear clause may make it harder to attract outside offers.

4. Understand the role of the agreement and Finnish law

Finland has no specific franchising legislation or mandatory registration system for franchise agreements. Nor does Finnish law prescribe a standard pre-contractual disclosure document specifically for franchising. Rights relating to a sale or transfer of the agreement therefore depend largely on the contract and generally applicable legislation.

Key legislation includes Finland’s Contracts Act, Unfair Business Practices Act, Competition Act and Trademarks Act. Under the Contracts Act, an unreasonable contractual term may be adjusted in certain circumstances, but you should not build your sale plans around that possibility. Negotiating clear terms in advance is a safer starting point than relying on a dispute later.

Information provided during contract negotiations must not be misleading. If the franchisor emphasises the potential to resell the business, ask it to explain any terms that restrict that possibility. The Finnish Franchising Association’s Code of Ethics, meanwhile, is a form of self-regulation, not law. Check whether the franchisor has committed to following it; it does not replace detailed transfer provisions.

Have a lawyer familiar with franchise agreements review the consent requirements, change-of-ownership clauses and buyout rights together, in particular. Ask a financial adviser to assess how those same terms could affect the business’s sale value.

Practical checklist: before buying, confirm in writing who you can sell to, how approval is obtained, what the transfer will cost and which agreement the new owner will operate under. This will help you build a business whose value you can eventually pass on to a successor.