Buying a US Franchise: Check Your Resale and Transfer Rights

Your eventual exit deserves attention before you buy a franchise. A profitable business may still be difficult to sell if the franchise agreement restricts buyers, imposes substantial transfer costs or leaves you responsible after completion. Within the US franchising community, resale rights vary between brands and contracts. Understanding those rights now helps you assess what you are actually buying.

Start with the disclosure and the contract

The Federal Trade Commission’s Franchise Rule requires covered franchisors to provide a Franchise Disclosure Document (FDD) containing 23 disclosure items. Item 17 summarises provisions concerning renewal, termination, transfer and dispute resolution. Use its transfer entries to locate the relevant clauses in the franchise agreement; the summary is not a substitute for reading those clauses.

The federal rule generally requires delivery of the FDD at least 14 calendar days before you sign a binding agreement with, or make a payment to, the franchisor or its affiliate in connection with the proposed franchise sale. It is a disclosure framework, not a federal guarantee that you can sell your business on terms you choose.

Some states also have franchise registration, disclosure or relationship laws. Relationship laws may affect transfer restrictions or the franchisor’s ability to withhold consent. Ask a US franchise solicitor or attorney to identify which state protections apply to your transaction and whether any contractual restriction conflicts with them.

Read the state-specific addenda as well as the main agreement. Do not assume that a clause appearing in a national contract is enforceable everywhere.

Establish who can buy and who controls approval

Owning the business does not necessarily give you unrestricted freedom to transfer the franchise. The agreement may require the franchisor’s written consent before you sell assets, transfer ownership interests or change control of the franchisee company.

Ask for a written explanation of the approval process, including:

• Buyer qualifications: financial resources, operating experience, training and any owner-management requirements.
• Decision criteria: whether approval rests on specified standards or broadly worded discretion.
• Timetable: when review begins, what makes an application complete and whether a decision deadline applies.
• Contract requirements: whether the buyer assumes your agreement or must sign the franchisor’s then-current version.
• Remaining term: whether the buyer receives only your unexpired years or can obtain a new term.

These details affect the pool of eligible buyers. A requirement for substantial personal involvement, for example, could exclude an investor who intends to appoint a manager.

Also check for a right of first refusal. This may allow the franchisor to buy on terms linked to a third-party offer before you can complete that sale. Have your adviser explain the notice requirements, response period and treatment of non-cash consideration. A prospective buyer may hesitate to incur investigation costs if the franchisor can step into the transaction.

Calculate the proceeds, not just the selling price

A transfer fee is only one potential deduction from a future sale. Depending on the agreement, approval might also require overdue payments to be cleared, equipment to be replaced, premises to be upgraded or the buyer to complete paid training.

Check Item 6 of the FDD for disclosed fees and reconcile it with the transfer clauses and any relevant schedules. Ask who must pay each cost: you, the buyer or whichever party the sale agreement specifies. Distinguish franchisor requirements from costs the parties can negotiate between themselves.

Build a simple illustrative exit calculation:

Sale proceeds minus debt repayment, transfer-related charges, required works, professional costs and applicable taxes equals estimated net proceeds.

Ask your accountant to test a sale earlier than planned, not just a successful exit near the end of the term. A short remaining franchise term or costly required upgrade may reduce what a buyer is prepared to pay.

Find out whether transfer fees are fixed, calculated by a formula or tied to a future fee schedule. Where costs cannot be established now, record that uncertainty rather than assuming today’s charges will remain unchanged.

Check whether a sale genuinely releases you

Approval of a transfer does not necessarily release the outgoing franchisee from every obligation. Ask what written release you would receive and whether any personal guarantee would end. Your lender and landlord may require separate releases; franchisor consent cannot resolve those obligations by itself.

Identify any continuing confidentiality, non-competition or non-solicitation restrictions. Their scope and enforceability require state-specific advice. Also ask whether consent depends on signing a release of claims against the franchisor, and have your adviser assess any limits imposed by applicable law.

Finally, check whether death, incapacity, family succession or an internal ownership reorganisation triggers the same approval process as an outside sale. Do not assume that transferring interests to a relative is exempt.

Practical takeaway: Before buying, prepare a one-page exit checklist covering eligible buyers, consent, timing, costs and release from liability. If you cannot explain how you would leave, you have not yet finished assessing how to join.