How Do I Settle Disputes Before Selling My Franchise?

Franchise owners preparing to sell their businesses should address outstanding disputes before putting their locations on the market. Unresolved legal, financial or operational issues can discourage potential buyers, complicate financing and delay the sale. Understanding how to settle disputes before selling a franchise can help owners avoid these problems and improve their chances of a successful transaction.

“An unresolved dispute is a discount, not a detail,” said Aaron Hall, a Minneapolis business attorney. “Buyers pay less, and lenders lend less, when there is an open lawsuit, a franchisor complaint or a partner disagreement hanging over the business, because they assume they may inherit it.”

Why Should Franchise Owners Resolve Disputes Before Selling?

Outstanding disputes can affect both the value of a franchise and a buyer's willingness to complete the purchase. Potential buyers typically review financial records, franchise agreements, legal obligations and other business documents during due diligence. Problems uncovered during that process can lead to additional negotiations or cause a buyer to reconsider the transaction.

Hall recommends resolving known issues before listing rather than waiting for buyers to identify them.

“Clearing those issues before you list is usually the highest-return thing a franchisee can do, since a clean business sells faster and closer to the asking price,” Hall said. “The time to fix a problem is while you still have leverage, not after a buyer finds it in due diligence.”

What Disputes Can Delay a Franchise Sale?

Franchisor disputes are among the most important issues to address before selling a franchise. Most franchise agreements require franchisor approval before ownership can be transferred, giving the franchisor an important role in the resale process.

“The one people forget is the franchisor itself,” Hall said. “Almost every franchise agreement requires the franchisor's approval to transfer, so an owner who is behind on royalties or out of compliance can have the sale blocked at the final step.”

Before listing their business, franchisees should make sure their royalty payments are current and that they have addressed any compliance issues raised by the franchisor. These problems could otherwise delay or prevent approval of the sale.

Disagreements between co-owners over the sale price or timing can also cause delays. Other potential problems include landlords who have not approved a lease transfer and unresolved claims involving employees or customers.

“Any one of these can stall a closing for months, and in almost every case the dispute was known long before the sale and simply never dealt with,” Hall said.

How Early Should Franchisees Prepare to Sell?

Franchise owners should begin addressing outstanding disputes well before putting their business up for sale. Hall recommends starting at least a year before they plan to sell.

“Start getting the business ready to sell a year out, not the month you list it,” Hall said. “Pull your franchise agreement and read the transfer section now, so you know exactly what the franchisor will require and how long approval takes.”

The transfer provisions may outline approval requirements, transfer fees, buyer qualifications and other conditions that must be satisfied before the sale can proceed. Understanding these obligations gives owners time to address potential problems.

Franchisees should also organize their financial statements, review outstanding debts and examine any agreements that could affect the transaction. Working with a qualified business attorney can help identify legal concerns and determine the appropriate steps for resolving them.

“A buyer is really paying for clean records and clear title to the business, so the year before a sale is best spent making both of those true,” Hall said. “Sellers who prepare early consistently get better terms than sellers who scramble.”

Key Takeaways: Steps to Take Before Selling Your Franchise

Franchise owners preparing for a resale can take several steps to reduce the likelihood of disputes interfering with the transaction:

• Review your franchise agreement. Examine transfer requirements, confirm that royalties and other payments are current, and address outstanding compliance issues with the franchisor.
• Resolve existing disagreements. Work through co-owner disputes, landlord consent issues and pending legal claims before listing the business. Consult an attorney when settlements or other legal agreements are necessary.
• Prepare at least a year in advance. Organize financial records, review outstanding obligations and establish a timeline for obtaining required approvals.

Knowing how to settle disputes before selling a franchise can help owners protect the value of their investment and avoid unnecessary delays. By addressing known problems early and preparing the business for buyer scrutiny, franchisees can enter the resale process in a stronger negotiating position.

For more on selling your franchise, check out these articles on 1851 Franchise: 

• How Do I Exit a Franchise Agreement? Understanding Your Options
• Can I Sell My Franchise Business to Another Franchisee?
• Can I Sell My Franchise Later? A Guide for Prospective Franchisees