Selling Your Franchise: What Are Your Rights?

Would you like to sell your franchise? Easy enough in theory, but not necessarily so easy in practice – the terms and conditions for selling your franchise are outlined in the Franchise Agreement, and Franchise Agreements are as a rule drafted with the interests of the franchisor in mind. Hence, you may very well find buy-back and right of first refusal clauses in the Franchise Agreement, which limit your rights regarding selling your franchise business.

Buy-back and first refusal clauses give the franchisor the right to (1) buy back your existing business from you before you can accept offers from other buyers and (2) first refuse to buy back your business before you entertain outside offers. The purpose of these clauses is to give franchisors control over who enters their franchise system: they have the ability to buy your business at a low cost so they can then sell to another franchisee for a substantial profit.

In the case of buy-back arrangements, a franchisor typically will send an appraiser to valuate your franchise, which the franchisee may or may not have to pay for – luckily, most franchisors are quick to decide whether or not they want to buy back your business, which equals less cost to you for the appraisal. You may not get the best rate in a franchisor buy-back arrangement, as the franchisor is ultimately out to make a profit that is by its nature at the franchisee’s expense.

Regarding first refusal rights: generally, the franchisor matches the offer of an outside buyer. Should the buyer’s offer include non-cash payment (i.e. real estate), the franchisor may send an appraiser to valuate the worth of the property as well as other non-cash assets.