What If My Franchisor Wants to Buy Back My Store?

A franchisee may spend years building a successful business, only to receive an unexpected offer from the franchisor to buy it back. While that might sound unusual, franchise buybacks happen for several reasons, including an owner's retirement, changes in the company's growth strategy or an opportunity to take over an established location.

If your franchisor approaches you about purchasing your business, the first step is to understand why the company is interested and what the offer means for you.

Why Would a Franchisor Want to Buy Back a Location?

Franchisors may purchase existing locations to operate them directly, improve performance or eventually resell them to another franchisee. In some cases, a buyback provides an exit opportunity for an owner who is ready to retire or move on.

Brian Scudamore, founder of 1-800-GOT-JUNK?, discussed his company's approach during an appearance on “The Wealthy Barber” podcast.

"We created a bit of a fund so that we can buy back some franchises if they're underperforming or someone wants out, and then we end up typically doubling them in two or three years,” Scudamore said. “But we really are in the business of franchise development, finding great franchise partners and helping them be successful.”

His example shows how a franchisor can use buybacks to give existing owners an opportunity to exit while taking over operations at established locations.

Do You Have to Sell?

In most cases, a franchisor cannot simply require an owner to sell because it wants the location. However, the franchise agreement may contain provisions that give the franchisor certain purchase rights.

Other agreements may include a right of first refusal, which allows the franchisor to match an offer from an outside buyer, or repurchase provisions that apply under specific circumstances, such as termination or expiration of the franchise agreement.

Franchise attorney Anthony Lopes, managing partner of Lopes Law LLC, addressed these issues in a recent blog post about franchisor buybacks.

"During the active term of your franchise agreement, a franchisor generally cannot force you to sell," Lopes said. “Your agreement is a binding contract that entitles you to operate for the full term.”

Before responding to an offer, review your franchise agreement to understand what rights the franchisor has and whether you are obligated to sell.

How Is the Purchase Price Determined?

A franchisor may consider the location's revenue, profitability and assets when making an offer. The remaining term of the franchise agreement and the condition of the business may also affect its value.

Franchisees should not assume the first offer represents the full value of their business. An independent business valuation can help determine whether the proposed price is reasonable.

"The purchase price is important, but it is not the only term that matters in a franchise buyback," Lopes said. “Negotiate a reasonable transition period and ensure you are compensated for any period during which you continue to operate the units after the purchase agreement is signed.”

He recommends reviewing the full agreement, including any personal guarantees, noncompete restrictions and obligations that may continue after the sale. Owners should also consider outstanding loans, taxes and other financial obligations that could reduce the amount they receive from the sale.

Key Takeaways: What Should You Do Before Agreeing to a Buyback?

A buyback offer does not necessarily mean something is wrong with your business. As Scudamore's example shows, franchisors may purchase locations from owners who are ready to leave the system, as well as those whose businesses are underperforming.

Owners should take time to review the proposed terms, understand their contractual obligations and consult a franchise attorney and accountant before signing anything.

“The answer to when you should hire a franchise attorney is before you respond to the franchisor’s offer,” Lopes said. “Once you engage in direct negotiations without counsel, you may inadvertently make concessions, agree to terms or provide information that weakens your position.”

Here’s what to consider before agreeing:

• Review your franchise agreement. Check whether the franchisor has the right to buy back your location and under what circumstances.
• Understand why the franchisor wants to buy. The company may want to operate the location itself, improve its performance or resell it.
• Get an independent valuation. Don't assume the franchisor's initial offer reflects the full value of your business.
• Look beyond the purchase price. Consider outstanding loans, taxes, personal guarantees and any restrictions that may apply after the sale.
• Seek professional advice. Have a franchise attorney and accountant review the terms before signing anything.

A franchisor buyback can provide a convenient exit opportunity, but it is still a business transaction. Franchisees should understand their options and make sure the agreement protects their financial interests before moving forward.

For more on exiting a franchise, check out these articles on 1851 Franchise: 

• How Do I Exit a Franchise Agreement? Understanding Your Options
• How Do I Exit a Failing Franchise? What Owners Should Know
• Can I Sell My Franchise Business to Another Franchisee?