Franchise resales keep a restaurant system alive. New restaurant owners inject energy into existing units, driving continuity and growth. They often sign up for additional units, leveraging cash flow from the open and operating location. As “new kids on the block” they are open and excited to adopt the latest marketing strategies. But for franchisors, tackling these transitions can result in legal entanglements they should definitely avoid. This includes everything from state brokerage laws to lease assignment hurdles. This article helps you understand how a seemingly innocent means of assisting your franchisees can lead to conflict of interest claims, spark lawsuits, bleed resources, and undermine your brand’s reputation. One slipup is not worth the risk of fines, disputes and franchise brand fallout.

How do you avoid these risks? First, don’t take them on at all. Connect with a national firm like We Sell Restaurants where Certified Restaurant Brokers® handle the messy business of transfers and keep your hands free of any claims.

Let a licensed pro cut through the resale chaos, dodge the legal traps and deliver a seamless handoff to not only safeguard your current system but also fuel expansion. In this article we will reveal the legal risks of franchise resales, the hidden perils of DIY management, and why an independent, professional, licensed and insured resource is the choice of franchisors seeking to avoid disaster and secure success.

The Legal Maze of Franchise Resales – a Web of Rules and Requirements

Franchise resales are a regulatory beast. Certified Restaurant Brokers working in this space daily are comfortable discussing past performance and even discussions around future projections. That’s an absolute no for new franchise sales. That’s only one example of how using your existing franchise development team members that do not have the same level of financial education or experience, could put you at risk for mixing up financial disclosures and providing estimates between resales and new sales. That is only one example. Here is a partial list of the others:

• FDD Compliance: The FTC requires that new franchise sales limit discussion to financial disclosures made only on the Item 19. If your franchise development team moves between new sales with limited disclosure rules and resales where the buyer requires history on the unit, there is the potential for slipup. Resales aren’t worth the exposure incurred when a franchise development specialist starts sharing existing numbers from resale units with candidates for new stores and going off script on your financial disclosures.
• Lease Assignments: Transfers hinge on landlord approvals, lease assignments and negotiations and state real estate rules are very specific. That’s why a real estate license is required in multiple states and attorney do the legal work on lease assignments. Involving your General Counsel for the brand is always an option but that has the potential to slow down progress or bottleneck development work they might otherwise be engaged with.
• Brokerage Laws: Fourteen states (e.g., Georgia, California, Florida) mandate real estate or broker licenses for business sales. Unlicensed work is a third-degree felony in these states, and that’s no laughing matter.
• Confidentiality Agreements: Existing business sales require complete confidentiality between the would-be buyers and sellers. Failure to get this in place that is specific for state law where the unit is located opens up another can of worms for franchisors.
• Contractual Agreements: Resales require a buy-sell agreement between the two parties. Franchisors do not want to be in the position of providing legal documents, another potential trap called “practicing law without a license.”
• Escrow Funds: Escrow or the sales deposit is generally held by a third party. If the franchisor is handling the deal, then who is handling the funds? This is the single biggest bone of contention between buyers and sellers. It is also the most strictly audited element of all real estate transactions and subject to audit by the real estate commission. Working in a state that requires a real estate license and holding escrow if you are not an attorney is a pathway to problems.
• Franchise Approval: The approval process for a resale should be consistent with the process for a new sale. Expediting an approval for a franchisee to take over a struggling store without the same due diligence as a new franchisee leads to inconsistency, a term you don’t want to apply to your franchise system.
• Valuations and Lending Approvals: Lending with third parties and the valuation process should be hands-off for franchisors. You need independent evaluation of the locations to ensure there is no potential for conflicts of interest.
• Tax and Lien Checks: Unseen IRS liens or sales tax debts can stick to the unit if not flagged pre-sale. An attorney outside the franchise performs these as part of a closing process but in house counsel may not be as familiar with these requirements. After all, the General Counsel works for your brand and is most concerned with getting franchise agreements signed.

The Cost of Slip-Ups - Mistakes hit hard:

What happens when franchisors and their employees fall into these traps when attempting to handle franchise resales on their own. None of the outcomes are good starting with the most taxing for the brand.

Lawsuits: Franchisees that feel they have an opening under any of these elements, whether or not they are actually harmed, may involve the franchisor, simply because they have the deepest pockets. When the buyer walks away and the seller feels damaged, the biggest target left standing could be the franchisor. While that can lead to both monetary claims and settlement, there is also a reputational cost to consider here.

Fines: Real estate fines vary by state but penalties for unlicensed brokerage ranges from $500 per day to an amount per violation (deal) of $5,000 to $25,000 per violation.

Brand Damage: A resale flop injects chaos into the system, potentially leading to a closed location or disgruntled franchisee. What are examples of this? Deals that fall apart. Deals that can’t be funded because no one has the financial expertise to perform the valuation and do the recasting for the bank. Landlord negotiations that fall apart because an extra option term can’t be negotiated. Franchise resales have much more complexity than simple franchise sales so any number of items can stall or terminate a deal.

Operational Drag: Any focus on resales is a missed opportunity to coach a new store to opening whether it’s in franchise development, operations, or compliance. SNO – the infamous, Sold Not Open on your Item 20 are a true indicator of whether the “time suck” of transfers is taking energy from opening new stores.

Revenue Impact: Units in transition are frequently not running at the top of their game. As the deal hits snags or delayed, that means revenue is stalled as well. The faster these units that are under performing transfer to new buyers, the better the revenue overall, including the higher potential for royalties.

All of these factors underscore why franchise transfers are so critical to the health of the brand. It’s not just about exiting a location—it’s about preserving the strength of the entire system. Attempting a resale without the right expertise introduces risk into a process that demands precision. A qualified brand partner brings deep compliance knowledge and a structured approach that helps ensure a smooth, successful transition.

The Biggest Issue – Pricing

Franchisors often wrongly assume that internal teams can manage resales until the risks surface. As long as deals are on track, everyone is happy. As soon as a deal goes south, the risks become apparent. In our opinion, the greatest risk is that of a conflict of interest between you and the franchisee.

Setting any form of pricing is a mistake for a franchisor. While they know the market intently for new startups, they do not have industry knowledge about comparable selling prices, current lending climate for resales and accurate valuation modeling.

It’s a no-win situation for the franchisor. If a buyer (your new franchisee), becomes unhappy with the pricing, he will blame the franchisor. If the seller, (your existing franchisee), believes he is not receiving fair value, he will blame the franchisor. The only way to avoid this is with the use of an independent third-party resource.

Here is a real-world example we were called in to overcome. A sandwich chain’s internal team botched a $600,000 resale. The team was assisting a group in Florida, which requires a real estate license but in good faith, wanted to “help” the franchisee. They provided a valuation that was incorrect, (overvalued by $100,000), and gave both the seller and buyer forms for a buy-sell agreement without the consent of the General Counsel.

Once the deal fell apart, both parties were looking for blood. The seller threatened to sue. His points?

• He relied on the brand for pricing and their valuation was incorrect.
• They didn’t collect escrow or protect his interest.
• There was no confidentiality agreement in place and his entire team found out the store was for sale, leading to labor issues.
• His threat – they were performing business brokerage without a license.
  
  

In the end, the brand had to step in and purchase the store to resolve the situation. We Sell Restaurants provided an independent valuation and stepped in to help prevent an even more challenging outcome.

This raises an important question—why would any franchisor take on this process alone when it can be effectively outsourced? It's time for brands to have direct, strategic conversations with their franchise business consultants about the value of being involved in resales. While a DIY approach may seem supportive to the franchisee, it often leads to unintended consequences—legal exposure, regulatory penalties, and growing franchisee dissatisfaction.

How We Sell Restaurants Mitigates Legal Risks

A third-party expert like We Sell Restaurants helps you mitigate these risks. They meet all the protocols for outsourcing this task and protecting the interest of the brand include:

Licensing & Compliance: We Sell Restaurants is licensed for each state where required for business brokerage and many beyond that.

Insured: We Sell Restaurant and its franchisees are insured for safety and to be sure there are no gaps that can’t be covered.

Franchise Fluency: As a franchisor, our Certified Restaurants Brokers understand the process of transfer.

Lease Wizardry: Certified Restaurant Brokers are pros at spotting landlord issues and preparing candidates for assignment.

Overall, the brand serves as a buffer that works. They become your shield—mediating seller-buyer negotiations to kill confusion and lead to done deals. They shoulder the legal weight, keeping your system bulletproof.

DIY vs. We Sell Restaurants: A Head-to-Head Look

Here’s how internal resales stack up against We Sell Restaurants—spoiler: it’s no contest.

DIY’s a legal and logistical trap—We Sell Restaurants turns risks into results.

Ditch the Risk, Win the Game

Franchise resales are a legal labyrinth (say that three times fast!) with everything and anything that can put a deal on the skids. Going in-house is a high-wire act with risks on multiple fronts.

Franchisors should not bet their system on DIY processes. Stick to what you know best whether it fantastic food or more. Partner with We Sell Restaurants - experts who turn complexity into closings.

Resales done right are a springboard. With We Sell Restaurants, legal risks vanish, franchisees thrive, and your system soars. Why tempt fate when you can claim victory?