Franchise for Sale: What to Check in the Franchise Agreement

When you buy a franchise for sale from an existing owner, you are not only buying a business. You are stepping into a contract with a franchisor who sets your fees, decides whether the sale can go ahead and controls what you must spend to stay in the system. The franchise agreement and the Franchise Disclosure Document (FDD) tell you most of what you need to know. Here is what to read closely, and what to ask, before you make an offer.

How a franchise resale differs from buying a new franchise

A resale gives you trading history, trained staff and existing customers. The catch is that the seller's agreement may not be the one you end up signing. Many franchisors require a buyer to sign their current form of agreement, which can carry a different royalty rate, a new term or stricter remodel obligations.

So ask early: will the existing agreement be assigned to me, or will I sign a new one? Get a copy of whichever applies, plus the franchisor's current FDD. Depending on how involved the franchisor is in the sale, it may not be required to give you an FDD, so ask for one directly. It shows the franchisor's own financial statements (Item 21) and contact details for other franchisees (Item 20), both of which you will use later.

Remaining term and renewal: how many years are you buying?

Find the start date and the expiry date. If four years remain, you are paying for four years of trading plus a right to renew, not a business that runs forever. Read the renewal clause and note:

• How many renewal terms are allowed, and how long each lasts
• The renewal fee, if any
• Conditions such as no defaults, remodeling to current standards, signing the then-current agreement and giving a general release
• The notice window, since missing it can cost you the renewal
• What happens if the franchisor declines: de-branding, a post-term non-compete and possibly losing the location

A short remaining term with tough renewal conditions should lower the price you are willing to pay.

Will the franchisor approve you as the new owner?

Almost every franchise agreement gives the franchisor the right to approve a transfer. Expect an application, a check of your net worth and liquid capital, an interview and completion of training before closing. There is usually a transfer fee; the agreement may say who pays, but it is often negotiable between buyer and seller.

Also look for a right of first refusal, which may let the franchisor buy the business on the same terms you agreed. Check whether you must sign a personal guarantee. Make franchisor approval a written condition of your purchase agreement, with a deadline, and do not release your deposit until approval is confirmed in writing. If you are using an SBA-backed loan, your lender will review the franchise agreement too.

What royalties and marketing fees will you pay?

Rebuild the seller's profit and loss using the fees in the agreement you will sign, not the ones the seller pays today.

Fee	Usually charged as	What to ask
Royalty	Percentage of gross sales, sometimes a flat amount	Gross or net sales? Is there a minimum?
Marketing or ad fund	Percentage of gross sales	How is it spent? Is there a separate local ad requirement?
Technology or software	Monthly charge	How much has it risen recently?
Transfer and training	One-off	Who pays, and when?
Renewal	One-off at renewal	How much, and is it fixed?

Check Item 8 of the FDD as well. It covers required suppliers and whether the franchisor earns money from your purchases, which can squeeze margins as much as royalties do.

Territory protection and remodels you may have to fund

Read how your territory is defined: a radius, zip codes or a population count. Then look for carve-outs. Many agreements exclude online sales, delivery apps or nontraditional venues such as airports and stadiums. Item 12 of the FDD covers territory, and it is worth asking whether new units are planned nearby.

Remodels are the other big cost. Agreements often require periodic refreshes, and a transfer can trigger one. Ask the franchisor for a written list of required upgrades with estimated costs, then either deduct it from the price or ask the seller to complete the work before closing.

What should you ask other franchisees?

Item 20 lists current franchisees and those who left the system recently. Call several of each, including owners in markets similar to yours. Useful questions:

1. Is the business as profitable as you expected? How long did it take to get there?
2. How useful are field support, training and marketing?
3. Have fees or required suppliers changed since you joined?
4. How did the franchisor handle disputes or a transfer?
5. Would you buy again?

Former owners are often the most candid. Before signing anything, have a franchise attorney review the agreement and a CPA review the numbers.

When you are ready to compare opportunities, browse franchises for sale on BizMarketplace or look at businesses for sale near you to see which brands trade locally.