5 Questions Every Franchise Brand Should Ask Before Approving a Transfer

Every franchise system will experience unit turnover. Owners retire, relocate, or pursue new ventures. When that happens, a resale or transfer is often the best path forward. But approving a resale isn’t just about checking boxes. It’s a critical brand decision that impacts system health, customer experience, and future validation. It’s critical to protect the brand through resale decisions.

In fact, according to the 2024 Annual Franchise Development Report (AFDR), resales typically represent 5% or less of a brand's operating units annually, though this figure has been higher in recent years due to lingering effects from the COVID-19 pandemic. When turnover occurs, a resale or transfer is often the most viable path forward for all parties involved.

However, approving a resale goes far beyond mere administrative checkboxes, it's a pivotal brand decision that can profoundly influence the overall health of the system, customer satisfaction, franchisee morale, and even future validation efforts from prospective buyers. Poorly vetted transfers can lead to operational disruptions, brand dilution, or legal complications, while well-executed ones can inject fresh energy and drive growth. Protecting the brand through thoughtful resale decisions is paramount, especially considering that franchise resales often sell at a premium, higher than comparable non-franchise businesses, thanks to their established track records and support structures.

Before greenlighting any transfer, franchisors should rigorously evaluate the opportunity by asking these five essential questions, expanded here with additional considerations, to ensure the resale bolsters rather than undermines the franchise system. We've also added a sixth question to address often-overlooked legal and regulatory aspects.

Question 1: Is the Buyer Qualified Beyond Just Capital?

Financial capability is essential, but it's not the only qualification that matters. In lending, it is said that banks look at the 5 C’s of credit which include, character, capacity, capital, collateral and conditions. Character relates to how you have historically repaid your debt. Capacity looks at the ability of the borrower to make payments based on cash flow. Capital are the personal investments or assets of the candidate while collateral are the assets to secure the loan. The final “C”, conditions, considers external factors that affect repayment.

This same exercise can be applied to the franchise transfer candidate. What is their credit score, or history of repayment? Capacity may apply to their operational or leadership skills needed to succeed in the brand. It’s important that they understand the brand's values, systems, and expectations. Capacity comes into play as you weigh the ability of the business, absent any improvements, to meet the lending requirements. Many brands have net worth requirements and liquidity requirements that align with the capital they believe is necessary to operate the unit. These should not be abandoned, thought they may evolve for a transfer situation.

In addition to the 5 C’s, franchisors should also assess:

• Relevant industry or business experience
• Leadership style and willingness to follow systems
• Attitude toward training, compliance, and community engagement

• Background checks for any red flags, like legal issues or disputes with previous business partners.
• Financial stability projections, including how they plan to manage cash flow during the initial transition period.

Approving a resale essentially means endorsing a new ambassador for your brand. Ensure they're not just financially solvent but culturally and operationally aligned to uphold your standards and drive success.

Question 2: Is the Unit in Resale-Ready Condition?

A buyer may be eager, but is the location they are buying positioned to support long-term success? In the early stages of growth, some brands place stores in areas they later regret or consider less than optimal. On the other hand, stores that the current owner or brand may have written off, may thrive under new leadership. For some concepts, with delivery and take out contributing a significant portion of their sales, location is less important than ever before.

A transfer is often a time when the brand will request or require a refresh or update to the newest brand standards.

Evaluate:

• Physical condition of the space (cleanliness, branding, signage, etc.)
• Equipment status and any deferred maintenance
• Staff turnover or morale issues
• Whether the location meets current brand standards, such as ADA compliance, digital integration (e.g., POS systems), or sustainability features.
• Lease terms and renewal options, ensuring no impending expirations or unfavorable clauses that could burden the buyer.
• Local market dynamics, like demographic shifts or competitive landscape changes that might affect viability.

If the unit requires upgrades, it may be appropriate to require renovations as part of the resale terms. It’s a good idea to weigh the necessary requirements to upgrade against the costs the buyer will experience in a less desirable location.

Question 3: What Are the Seller’s Real Motivations and Timing?

Understanding why the seller is exiting helps you manage brand risk and set realistic buyer expectations. We encourage brands to discuss exit strategies with their franchisees long before it seems necessary. Establishing a culture to discuss where someone is emotionally and financially while providing solutions demonstrates that are you are committed to their success.

Ask:

• Is the seller exiting due to burnout, underperformance, or personal reasons?
• Has the unit been marketed properly, or is this a last-ditch effort?
• Are there seasonal, lease, or financial pressures driving the timeline?

A rushed or emotional sale often leads to misalignment between buyer expectations and operational realities. Timing matters for both for the seller and the brand.

Question 4: Will This Buyer Strengthen Our System Long-Term?

Every franchise resale is a chance to upgrade your bench. Is this buyer someone who might expand to additional units, support local development, or drive operational excellence? Most transfer units actually significantly improve under the operations of a new owner. It’s also an opportunity to add additional development agreements into the mix.

Consider:

• Their long-term goals: multi-unit ownership, area development, etc.
• Their alignment with your brand culture
• Their potential to raise the performance bar within your network

• Alignment with your brand culture values, and vision—evaluate through interviews or references.
• Potential to raise the performance bar, perhaps by introducing innovative ideas while adhering to systems.
• Track record in scaling businesses or mentoring others, which could benefit peer franchisees.
• Willingness to participate in advisory councils, marketing cooperatives, or innovation pilots.

A resale isn’t just a transaction—it’s a reinvestment in your system’s future. View it as a strategic reinvestment that can enhance network resilience, boost average unit volumes, and attract higher-caliber future franchisees.

Question 5: Are We Managing the Transition Proactively?

Smooth transitions require coordinated planning between the seller, buyer, and franchisor. A Certified Restaurant Broker knows how to quarterback deals and help to manage transitions both before and after a decision to exit has been made. They can assist you with the right checklists.

Ensure:

• A defined training and onboarding schedule, including seller-to-buyer knowledge transfer and franchisor-led sessions.
• Clear communication of legal documents, transfer fees, royalties, and any ongoing obligations like advertising fund contributions.
• Early involvement of your operations team for site visits, inventory audits, and performance benchmarks.
• Control over the brand narrative, such as coordinated announcements to customers, staff, and suppliers to maintain trust.
• Post-transfer support, like 90-day check-ins to address teething issues and ensure compliance.
• Contingency plans for potential hiccups, such as interim management if the seller exits abruptly.

Franchise systems thrive when resales are treated as strategic moves—not reactive cleanups.

Question 6: Have We Ensured Compliance with All Legal and Regulatory Requirements?

Overlooking legal nuances can expose the brand to significant risks, including lawsuits or rescission claims. Franchise agreements typically require franchisor consent for transfers, but involvement levels must be carefully managed to avoid triggering disclosure obligations under franchise laws. Always review the Franchise Disclosure Document (FDD) provisions, particularly Item 17 on renewals, transfers, and terminations.

Critical checks include:

• Disclosure of the candidate under the current FDD.
• Obtaining necessary consents from landlords, lenders, suppliers, and regulatory bodies.
• Collecting transfer fees without overstepping into "effecting" the sale, which could negate resale exemptions.
• Documenting all approvals and communications to create a defensible audit trail.
• Consulting legal experts to navigate state-specific franchise regulations and mitigate risks.

Proactive compliance not only avoids pitfalls but also reinforces the brand's professionalism.

Conclusion: Resales Can Strengthen or Strain Your Brand

Franchise resales are unavoidable, but poorly handled resales are entirely preventable. When franchisors take a strategic approach to buyer vetting, unit readiness, and transition management, resales become brand-building opportunities.

Ask the right questions up front, and you’ll protect what matters most—your brand, your system performance, and your franchisee community.

By adopting a strategic lens, vetting buyers rigorously, ensuring unit readiness, understanding motivations, evaluating long-term fit, managing transitions actively, and prioritizing legal compliance, franchisors can transform resales into powerful brand-building catalysts. This approach safeguards the system's integrity, enhances resale values (which already outpace non-franchises), and fosters a supportive community. Ultimately, asking the right questions upfront protects your brand's legacy, optimizes performance, and empowers your franchisee network for enduring success.