Can I Sell My Franchise Business to Another Franchisee?

If you’re ready to sell your franchise, another owner in the system may be one of the first places to look. They already know the brand and how the franchise system operates, which can make the process easier. But even if you find a willing buyer, the franchisor still has a say in whether the sale can move forward.

Does the Franchisor Have to Approve the Sale?

Most franchise agreements require franchisor approval before a franchise can be transferred, whether the buyer is a new operator or someone who already owns locations within the system. That approval requirement stems from the nature of a franchise agreement. Franchisees receive the right to operate using the franchisor’s trademarks, brand and operating system, which means the franchisor has an interest in controlling who is authorized to use them.

Even an existing franchisee isn’t automatically approved to buy another location. The franchisor may look at the buyer’s current performance, compliance with brand standards, history of defaults and relationship with the franchisor before deciding whether that operator is ready to expand.

“If you have a potential buying franchisee who’s demonstrated their ability to comply and to follow, their ability to successfully run locations and their ability to work in a professional and friendly manner with the franchisor, franchisors should love that as a potential buyer,” said Paul Woody, a partner with UB Greensfelder who advises franchisors.

Why Selling to Another Franchisee Can Be Easier

An existing franchisee may be familiar with lenders commonly used within the brand, understand the financial metrics involved in operating the business and require less training than someone entering the system for the first time. They also have experience with the franchisor’s operating expectations.

“The franchisee coming in most likely won’t have to go through training before they can take over and begin operating the location,” Woody said. “There may be some training the franchisor wants them to do as a refresher, but they can step in with a much lower learning curve and begin operating the location immediately. There’s also not that ‘getting to know you’ part that’s involved in selling to a third party that’s not already in the system.”

That familiarity can also benefit the franchisor. Instead of introducing a new owner to the concept and determining whether that person can successfully operate a franchise, the franchisor already has experience working with the prospective buyer.

Still, every transfer is evaluated individually. A franchisee who is struggling with existing locations, has compliance problems or has had ongoing issues with the franchisor may not receive approval to acquire another unit.

How Can You Prepare Your Franchise for a Sale?

Franchise owners shouldn’t wait until they are ready to leave the business to begin preparing for a sale. A prospective buyer needs enough information to understand how the business has performed, where it has been successful and where there may be room for improvement.

“Your financials need to be strong,” Woody said. “You need to ensure that you have orderly financial documents that show the performance in a way that a buyer is going to be able to evaluate it.”

Owners should also consider how easily the business can continue operating after they leave. Consistent management, solid operating performance and evidence that the local market can continue supporting the location can all help a prospective buyer evaluate the opportunity.

Relationships within the franchise system can matter, too. An owner who has developed positive relationships with other franchisees may have an easier time identifying someone within the system who is interested in expanding.

What Should the Buying Franchisee Review?

Before purchasing another franchisee’s business, the buyer needs to determine whether the location and sale terms make financial sense. The franchisor should provide the prospective buyer with its current Franchise Disclosure Document (FDD), particularly since an established franchisee may not have reviewed the latest version in some time. In some circumstances, the franchisor may also be able to provide historical financial information about the specific location being sold.

But the buyer shouldn’t rely on the franchisor to perform due diligence on their behalf.

“The franchisee needs to do its own investigation,” Woody said. “It needs to have its own business adviser, whether it’s an attorney or an accountant or both or somebody who’s familiar with the business.”

The franchisor may review the purchase price and payment terms as part of the transfer approval process, but that review is generally intended to determine whether the deal could leave the buyer with unsustainable financial obligations — not whether the buyer is getting a good deal. The buyer still needs to independently review the financial records, purchase terms and condition of the business before moving forward.

Key Takeaways: What to Do Before Selling to Another Franchisee or Buying From One

• Review your franchise agreement first. Look at the transfer provisions and speak with the franchisor before negotiating a sale. Even when the buyer is already in the system, franchisor approval will likely be required.
• Get your business ready before you put it on the market. Keep financial records organized, maintain strong operations and make sure the business can continue running smoothly without you.
• Do your own due diligence if you’re the buyer. Review the current FDD, examine the location’s financial history and work with an attorney, accountant or other qualified adviser to evaluate the purchase and its terms.

So, can you sell your franchise to another franchisee? Usually, yes. For the right seller, buyer and franchisor, an internal transfer can reduce some of the uncertainty involved in bringing a completely new owner into the system, but it still requires approval and careful financial review.

For more information on franchise exits, check out the following articles on 1851 Franchise: 

• How Do You Successfully Prepare to Sell a Franchise Business?
• Guide To Buying Another Franchise: Think about Your Exit
• What Happens If I Want Out Early? A Guide For Prospective Franchisees