Buying a Franchise in South Africa: Check Resale Rights

Before joining South Africa’s franchising community, understand how you could leave by selling your business. A successful outlet is not necessarily easy to transfer: your agreement may control who can buy it, what the transfer costs and whether you receive value for the goodwill you have built. Checking these provisions before buying helps you assess the investment beyond opening day.

1. Understand what you would actually be selling

A franchise resale usually involves more than handing over equipment and keys. You may own the operating assets or shares in the franchisee company, but the right to operate under the brand remains subject to the franchise agreement.

Ask the franchisor to explain the permitted sale structures. Would you sell the business assets, transfer shares in your company, or use either route? A clause dealing with a change of control may require approval even where the franchisee company itself remains unchanged.

Then establish what the buyer receives. Can the existing agreement be assigned, or must the buyer sign a new agreement? If a new agreement is required, its fees and obligations could affect what a buyer is willing to pay.

Request the current transfer policy alongside the draft agreement. Treat an informal assurance that “you can always sell” as a starting point for questions, not a contractual right.

2. Know the South African legal framework

South Africa specifically regulates franchise agreements through the Consumer Protection Act 68 of 2008 (CPA) and its regulations. Common-law contract principles also apply.

Section 7 requires a franchise agreement to be in writing, signed by or on behalf of the franchisee, and compliant with prescribed information requirements. It must also meet the plain-language requirements of section 22.

Regulation 2 requires the agreement to address matters including goodwill and the assignment of rights. These are directly relevant to a future sale. Regulation 3 requires the franchisor to give a prospective franchisee a dated disclosure document, signed by an authorised officer, at least 14 days before signing the franchise agreement.

Section 48 prohibits unfair, unreasonable or unjust terms. However, do not assume that this automatically invalidates a restrictive transfer clause or gives you an unrestricted right to sell. Ask an independent franchise lawyer to assess the wording and its practical effect before you commit.

There is no general franchise-system registration requirement in South Africa. Association membership is not government approval of your agreement or its resale provisions.

3. Test the buyer approval process

A franchisor has a legitimate interest in the suitability of a replacement operator. The practical question is whether its approval process is clear enough for you and a potential purchaser to follow.

Get written answers to these questions:

• What experience, financial resources and personal involvement must the buyer demonstrate?
• Which documents must accompany an application?
• Who makes the approval decision, and is there a stated response period?
• Can approval be withheld at the franchisor’s discretion, or does the agreement set objective criteria?
• Must outstanding breaches or amounts owed be resolved before approval?
• Does the franchisor have a right of first refusal or another preferential purchase right?

Where a preferential right exists, check the notice procedure, response deadline and whether the franchisor must match a genuine third-party offer. Unclear procedures can leave a buyer waiting while funding arrangements expire.

Ask your lawyer whether a future sale agreement should make completion conditional on written franchisor approval. Do not assume that accepting a buyer’s offer authorises the franchise transfer.

4. Calculate what a resale could leave you

The headline sale price is not the amount you would necessarily retain. Ask for a written schedule of transfer-related charges and identify who pays each one.

Possible deductions include a transfer fee, legal or administration charges, required refurbishment, equipment replacement and amounts needed to settle outstanding obligations. Buyer training or a new joining fee may also affect the purchaser’s budget, even if you do not pay those charges directly.

Examine how the agreement treats goodwill. Distinguish the brand’s reputation from the value associated with your outlet’s customer relationships and trading record. Establish whether the agreement limits your ability to realise that value through a sale; do not assume the franchisor must compensate you for it.

Ask an accountant to prepare a sample net-proceeds calculation using clearly labelled assumptions. Include debt settlement, professional fees and the tax consequences of the proposed sale structure, rather than relying on an advertised business valuation.

5. Confirm when your responsibilities end

Approval of a buyer is not necessarily a release from every obligation. Ask what documents would formally record the transfer date, responsibility for existing debts and your release from future performance obligations.

Check which provisions survive the sale, particularly confidentiality and restraints on competing activities. Their wording may affect how you earn a living afterwards. Have your lawyer assess their scope and enforceability.

Practical takeaway: Before buying, obtain the transfer policy, map the approval process and model your likely net proceeds. A workable exit should be supported by clear written terms, not a promise that a buyer will eventually appear.