We all assume that joining a franchise system makes a business worth more when the time comes to sell it. The logic, on the surface, feels sound. A recognised brand. A proven operating model. Marketing already built. Training already written. Surely a buyer pays a premium for all of that.
The data tells a different story, and after thirty-five years of putting numbers to businesses at every stage of that assumption, I no longer find it surprising.
A client of ours, trading through a well-known franchise system, came to us to have the business valued ahead of a sale. On paper the numbers were solid. Long-standing customers, tidy premises, and a competent operator who had run the place well for years. What our client had not fully accounted for was the franchise agreement itself, and specifically who owned what.
When the sale eventually settled, close to one-fifth of the total price was directed straight back to the franchisor. Not because of some hidden fee buried in the fine print, but because that portion of the value being sold was, in truth, the franchisor’s own intellectual property. The brand, the operating system, and the territory rights never belonged to our client to sell. Our client had spent years building the trading result. The franchisor owned the container it sat in.
This is not an isolated case, and it is not unique to Negotia’s client list.
In June this year, ABC News reported on a Sydney franchisee couple who had invested more than a million dollars into their 7-Eleven petrol station, taking out a loan to cover the up-front goodwill fee. When their franchise term came to an end, 7-Eleven brought the site back under its own corporate management rather than allowing the couple to sell to a new operator. A franchise law academic told the ABC that what happened to them was unfair, but not illegal. The company was, quite simply, entitled to take back what had remained its own all along.
If the brand is not yours, the territory is not yours, and the operating system is not yours, what exactly are you selling when you walk away?
In a straightforward trading business, goodwill accrues largely to the operator who built it: the relationships, the reputation, and the habit customers have formed of walking through that particular door. In a franchise, a meaningful slice of that goodwill sits with the franchisor from the outset, whether or not the franchise agreement says so plainly. When we value a franchised business for sale, one of the first tasks is separating what genuinely belongs to the operator from what was only ever on loan.
This is not said to talk anyone out of franchising. For many operators it remains the right choice, particularly those who value structure and support over the freedom of building something entirely their own. But going in with your eyes open about what you are buying, and eventually about what you will be entitled to sell, saves a great deal of disappointment at the end.
You do not own the value.
You are renting it.
Before you sign a franchise agreement, or before you list a franchised business for sale, it is worth understanding precisely which parts of that business’s worth belong to you and which parts never did. That distinction should shape the price you are willing to pay at the start, and the price you can reasonably expect to receive at the end.
Kevin Lovewell is a Registered Business Valuer with over thirty-five years of experience in business valuation and brokerage. This article is general commentary and does not constitute legal, tax, or financial advice specific to your circumstances.
If you are considering buying into a franchise, or preparing to sell one, understand exactly what you own before you agree on a price. Contact Kevin Lovewell directly on 1300 551 757.
