How Do Franchise Transfer Fees Work and Who Pays Them?

When a franchise changes hands, the franchisor may charge a transfer fee. Depending on the agreement, that expense can affect negotiations between the buyer and seller, particularly if neither party has accounted for it in the purchase price.

According to Harris Chernow, partner and chair of the Franchise & Distribution Practice at Reger Rizzo & Darnall LLP, franchisors typically charge a transfer fee when an existing franchisee sells or transfers some or all of their ownership interest. These fees are generally established in the franchise agreement, but how they're calculated, who ultimately pays them and what additional expenses might arise can vary considerably.

A transfer can also trigger expenses beyond the fee itself, particularly when the franchisor requires the business to meet its current operating standards before approving the sale.

"What happens on a transfer is that there is an opportunity for the franchisor to say, as part of this transfer, you owe me a transfer fee. However,  if you're going to be selling your business, then you need to make sure the business is at current standards," Chernow said. "They may require as part of the transfer that the franchisee and the buyer make certain investments. It depends, again, on the type of franchise that it is, but they may have to make certain investments to bring everything up to current standards."

Those investments could include fresh paint, carpeting or new equipment. Chernow said franchisors may also require sellers to settle any outstanding financial obligations before approving a transfer.

How the Transfer Fees Are Structured For the Franchisor

Franchisors generally set transfer fees at a fixed dollar amount or calculate them as a percentage of the initial franchise fee in effect at the time of the sale. Many also charge the fee for each location involved in the transfer.

Although some franchisees may perceive these fees as an additional source of profit for the franchisor, Chernow said their primary purpose is generally to cover the expenses associated with approving a transfer and preparing an incoming owner.

"There's also a perception that the franchisor is using this as a profit center, and typically it's not," Chernow said. "The reason for the transfer fee is typically so that the franchisor can cover its costs: its cost of labor, its cost of being involved with the transfer, going through the approval, creating the paperwork. Maybe they do it internally. Maybe they use an outside lawyer to create their paperwork. Sometimes it also provides for them to cover the cost of training the new franchisee that is coming in, the buyer."

The franchisor may make some profit from the transfer fee, depending on how much it charges and what it spends on the transfer. The incoming owner may also benefit from the training and support the franchisor provides.

Chernow noted that some franchise systems require incoming owners to pay an initial franchise fee in addition to the transfer fee. Buyers should determine whether that requirement applies before negotiating a purchase.

The Seller Doesn’t Always Have to Pay the Transfer Fee

Another misconception according to Chernow, is that the seller has to absorb the transfer fee. While the franchise agreement establishes the fee, who ultimately bears that cost can become part of negotiations between buyer and seller.

"There's a misconception that if I'm selling you this franchise business for $1,000 and the transfer fee is $500, I'm like, 'Oh gosh, out of that $1,000, I've got to pay the $500,'" Chernow said. "No. It's a negotiating point that you should have had with that potential buyer: 'Hey, you're paying me $1,000, but by the way, you also have to pay the transfer fee on my behalf.'"

Buyers and sellers can negotiate whether one party will cover the entire fee or whether they'll share the expense. Chernow said the franchisor generally isn't concerned with which party provides the payment.

"As I like to say, green is green, and they don't care as long as it's green and it gets paid in full," Chernow said.

Multi-Franchisees Can Seek Lower Transfer Fees When Selling Several Units at Once

For multi-unit owners, transfer fees can become a substantial expense because they're typically calculated on a per-location basis. A seller who doesn't account for the total fee before negotiating a purchase price could see a significant reduction in the proceeds from the sale.

Chernow illustrated the potential problem with the example of a franchisee selling 20 locations in a system that charges a $10,000 transfer fee per unit.

"When somebody's transferring, they're like, 'It's a $10,000 transfer fee because I'm selling all 20 units to the same group, so I'll just pay the $10,000,'" Chernow said. "No. It's $10,000 times 20, which is a very significant number at that point. That's when it may become a profit center for the franchisor. It's also a potential negotiating point between the franchisee and franchisor as to, maybe they could reduce that since it's a multi-unit arrangement. 'Do we really need to spend $10,000 times 20? Can we come to some other reasonable number?'"

In that example, the total transfer fee would reach $200,000. Chernow said sellers should understand that expense before negotiating with the buyer and consider approaching the franchisor about reducing the fee when multiple locations are involved.

The expense can also become part of the negotiations between buyer and seller. If the seller hasn't accounted for the transfer fees when establishing the purchase price, those fees could substantially reduce the amount ultimately received from the transaction.

"Where people really get bent out of shape is when they realize that, my God, I had 20 units and now it's 20 times $10,000 and not simply $10,000," Chernow said. "They didn't negotiate with their buyer coming in that they were going to pick up the tab or whatnot. Then is it a reduction of the purchase price that they're actually receiving, the net proceeds?"

Franchise owners should understand the franchisor's approval requirements and the costs involved before agreeing to a sale. Required upgrades, additional fees and transfer charges for individual locations can all affect how much the seller ultimately receives.

Practical Takeaways for Franchise Buyers and Sellers

• Review the Franchise Agreement: Understand how transfer fees are calculated, what conditions apply and whether additional costs or upgrades may be required.
• Negotiate Who Pays: Buyers and sellers should agree on who will cover the transfer fee before finalizing the purchase price.
• Calculate Multi-Unit Costs: Owners selling multiple locations should determine their total transfer fees and consider negotiating a reduction with the franchisor.

For more information on franchise resale and ownership transfers, check out these related articles on 1851 Franchise:

• Can I Sell My Franchise Later? A Guide For Prospective Franchisees
• How Do I Prepare a Franchise for Resale? What Franchisees Should Know
• How Do You Successfully Prepare to Sell a Franchise Business?