I’m selling a franchise. Does the buyer have to pay fees to the franchisor?

I am selling an existing business that is part of a franchise. I have just realised a few days ago that in addition to my asking price ($260,000) the franchisor expects the purchaser to pay an additional $45,000 to join the group and $8000 to train the person. This adds another $53,000 onto my asking price.

Is it ethical for the franchisor to charge such a high amount to join the group via purchasing an existing business, thus putting the cost of purchasing my store out of reach of many buyers? Your advice as to whether I am within my rights to question this with the franchisor would be so much appreciated.

Kind regards,
Teresa

Hi Teresa,

The issue of selling a franchise is usually the furthest thing from a franchisee’s mind when they join a group.

Consequently many don’t fully examine that part of the franchise agreement that deals with resales, or if they do, so much time has elapsed between buying the franchise and now preparing to sell that they are no longer mindful of some of the conditions of sale imposed by their agreement.

Your question doesn’t provide a breakdown of your asking price of $260,000, so it is unknown how much is goodwill, plant and equipment, fixtures, fittings and stock. Often in franchise resales, the goodwill component replaces the initial franchise fee paid to the franchisor when the franchisee originally joined, plus this is further boosted by the profit performance of the business.

Your franchise agreement will state what additional costs might be required of a new franchisee, and how these are to be paid. For example, the fee to train the new franchisee might be paid by the new franchisee direct to the franchisor as an additional and separate fee, or might be packaged into the asking price and then remitted to the franchisor by the outgoing franchisee.

Also missing from your question is whether yours is a service or retail business. The resale value of retail franchises can be limited by the balance of the franchise term and lease, such that if there is only one year left on the lease and no chance of renewal, the balance of the franchise term may also be one year.

This represents a very short timeframe for a buyer to get a return on their investment compared to say, a five year lease and five year franchise term. In service franchising where the franchise term is not linked to a property lease, franchisors often start the clock again for a new franchisee (ie grant a new full term from their commencement).

In either case, the franchisor’s policy about charging an upfront franchise fee to the new buyer should be articulated in your franchise agreement. You can seek clarification from the franchisor on any aspect of your working relationship at any time, but at the end of the day, the entire basis of the relationship comes down to what both parties have signed off in the franchise agreement at the outset.

Jason Gehrke is a director of the Franchise Advisory Centre and has been involved in franchising for 18 years at franchisee, franchisor and advisor level. He provides consulting services to both franchisors and franchisees, and conducts franchise education programs throughout Australia. He has been awarded for his franchise achievements, and publishes Franchise News & Events, Australia’s only fortnightly electronic news bulletin on franchising issues. In his spare time, Jason is a passionate collector of military antiques.

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See also my recent SmartCompany article Tips for selling an existing franchise.