Buying a franchise from the actual franchisor

July 15, 2023

by a searcher in Hilton Head Island, SC 29928, USA

I have an off market deal.

The franchisor is selling the original location. Very healthy business, and the base from which they report and sell more franchises- in the CEOs interest for it to do well..

Here is where I am hung up- for the remainder of the time that I have this business (pending closing), his entity (the franchisor), will always get a % of revenue. Like an eternal seller note.

Any ideas on how to structure this to account for his continual second bite of the apple?

Reply by a searcher
from Virginia Polytechnic Institute and State University (Virginia Tech) in Blacksburg, VA, USA

This is SOP for a franchisor and there’s limited ability to negotiate this, because everything they do they’ll have to put in their FDD. If you want the business, just take your medicine. But make sure that you account for any royalties in your financial modeling. You can’t rely on seller’s financials because they probably aren’t paying royalties to themselves, so their P&Ls will look more profitable than those of a buyer.

Reply by a searcher
from Northwestern University in Washington, DC, USA

I have the same question as Milov. This is typical for a franchise model unless we are misunderstanding. The other question would be on any limits around selling the business that could potentially impact value.

+2 more replies.

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