As a corporate and franchise lawyer, I see these transactions presenting both opportunities and risks for franchisors. When handled properly, transfers can bring in well-capitalized, growth-minded operators who strengthen the brand. When mishandled, they can lead to underqualified buyers, operational decline, or legal exposure and added risk.
Below are several key best practices franchisors should follow to manage franchisee transfers effectively and protect the long-term health of the system.
Maintain clear and enforceable transfer provisions
A franchisor’s reference point in a resale is the franchise agreement. Strong transfer provisions ensure the franchisor maintains meaningful control over who can step into the system.
Essential elements include:
- Consent rights: The franchisor should have broad discretion to approve or deny prospective transferees based on objective criteria, including financial capacity, operational experience, and commitment to brand standards.
- Right of first refusal (ROFR): ROFR provisions allow franchisors to step in and purchase the business on the same terms, which can be strategically valuable when protecting territory integrity or consolidating units.
- Transfer fees: These compensate the franchisor for the administrative burden of reviewing new owners, providing training, and processing documentation.
- Cure requirements: Franchisees should not be able to transfer while in default. Requiring cure ensures franchisors are not inheriting problems.
As the economic environment fluctuates, franchisors must ensure their agreements reflect current market realities and remain enforceable under state franchise laws. Consult with franchise counsel to confirm that franchise documents are current and aligned with industry standards.
Implement rigorous buyer screening processes
In a higher interest rate environment and amid tighter credit markets, it is essential to carefully vet prospective transferees. A thorough screening process should include:
- Financial verification: Review of bank statements, tax returns, liquidity and net worth, and financing commitments.
- Operational capability assessment: Prior business experience, particularly in multi-unit or service-based models, is increasingly critical.
- Cultural and brand alignment: Buyers may be financially capable but poorly suited to systems requiring strict operational discipline.
Franchisors should not feel pressured to approve a buyer simply to facilitate a resale. Approving an unqualified operator can strain system performance and lead to future terminations. Buyers should be vetted with the same rigor as candidates developing new units.
Require updated training and onboarding for incoming buyers
Even when a unit is performing well, new ownership presents inherent operational risks. Many franchisors underestimate the importance of treating transfers with the same rigor as new openings.
Best practices include:
- Mandatory completion of full or condensed training programs
- On-site support and operational audits during the transition period
- Reinforcement of brand standards and compliance expectations
In today’s competitive environment, comprehensive onboarding is invaluable in preserving consistency across the system.
Maintain active communication with lenders and brokers
Transfers increasingly involve third-party financing, business brokers, and private equity investors. Establishing relationships with these stakeholders helps ensure smoother, more transparent transactions.
Franchisors should:
- Provide brokers with accurate resale guidelines
- Ensure lenders understand system economics and operational requirements
- Monitor the involvement of private equity investors, whose objectives may differ from owner-operators
With consolidation becoming more common in certain franchise sectors, franchisors must maintain a clear understanding of who is acquiring their units and why.
Treat transfers as strategic opportunities, not administrative events
Franchisors often view resales as transactional, but they can be strategically valuable moments to strengthen the system. Transfers present opportunities to:
- Upgrade underperforming locations
- Expand qualified multi-unit operators
- Introduce fresh capital and operational expertise
- Transition aging franchisee populations into new ownership
In an economy where business valuations fluctuate, proactive alignment with long-term system goals is critical.
Ensure legal compliance and reduce litigation risks
Transfer-related disputes are a common source of franchise litigation. To minimize exposure, franchisors should:
- Apply approval criteria consistently across all transfer candidates
- Document decision-making processes thoroughly
- Avoid representations regarding future earnings or valuations
- Update disclosure documents to reflect transfer-related fees, processes, and support, as appropriate
Clear documentation and consistent procedures help mitigate claims of misrepresentation or unfair dealing.
Conclusion
In today’s evolving economic environment, franchisee transfers and resales require more than administrative oversight. They demand strategic judgment, robust legal frameworks, and careful brand stewardship. By implementing strong transfer provisions, maintaining strict buyer screening, supporting incoming owners, and leveraging transfers as growth opportunities, franchisors can protect system integrity while empowering the next generation of operators.
