Selling a franchise business: consent, the buyer and the price

Start with your franchise agreement

The equipment, fit-out and stock are usually yours, you are the employer, and you may be the tenant (in some systems the franchisor holds the head lease). The right to run the outlet under the brand is a contract, and it moves only on the franchisor's terms. Read the agreement before you speak to anyone.

The Consumer Protection Act applies to franchise agreements whatever the size of the franchisee (sections 5(6) and 5(7)), and its regulations list what a franchise agreement must contain (regulation 2(3), GN R293 of 1 April 2011). For a seller, these clauses matter most:

With limited exceptions, the Act does not apply to agreements entered into before its general effective date of 31 March 2011 (Schedule 2, item 3; gov.za: commencement), and an agreement renewed after that date counts as a new one for these requirements (regulation 2(4)). If yours is older and was never renewed, have an attorney read it.

The franchisor's consent and approval of the buyer

Franchise agreements commonly make a transfer subject to the franchisor's written consent, and the franchisor is likely to assess a buyer much as it would a new franchisee: finance, experience, and whether they will run the outlet themselves. Some agreements also give the franchisor a right of first refusal. Tell the franchisor before you market the business, and ask in writing for:

• its approval criteria, the documents it wants from a buyer, and the training a buyer must complete, at whose cost;
• whether a buyer takes over your agreement by cession or must sign the current one, and on what royalty, fund and term;
• every amount due on transfer: any transfer fee, training, its legal costs and arrears;
• any refurbishment it will require, and whether it holds the lease.

There is no standard transfer fee: the agreement must state what is payable to the franchisor (regulation 2(3)(e)). It must also contain provisions that prevent unreasonable or overvalued fees, and a provision that conflicts with that is void to that extent (regulation 2(2)(b) and (e)). If a fee looks out of line, ask an attorney. Between you and the buyer, who carries the fee and the training cost is agreed in the sale agreement; towards the franchisor, you stay liable as the franchise agreement provides unless it releases you in writing.

If the buyer signs a new franchise agreement

The franchisor must give a prospective franchisee a dated and signed disclosure document at least 14 days before the franchise agreement is signed (regulation 3(1), Consumer Protection Act Regulations of 1 April 2011). Build those 14 days into your timetable. Ask your attorney whether a disclosure document is needed where a buyer takes cession of your agreement, and how the sale agreement should deal with the statutory rights the buyer's new franchise agreement carries against the franchisor, for example by making the sale conditional on that agreement being signed and in force.

What sets the price of a franchise outlet

A buyer is buying the outlet's future profit for as long as they can trade under the brand. The usual starting point is maintainable earnings: profit normalised and after every royalty and fund contribution, multiplied by a figure that reflects the risk. The equipment, fit-out and stock set a floor. See how to value a business in South Africa. For a franchise, these move the price:

• Term left and renewal. Years left and a right to renew are worth more than a short run with no option. If a buyer must sign the current agreement, its term and fees count instead.
• Upgrade obligations. A revamp required on transfer or renewal usually comes off the price, unless you do it first.
• The lease. Remaining term, rent and escalations, and whether the landlord will consent.
• Supply terms. Where you must buy from the franchisor or approved suppliers, those prices set your margin. Buyers will ask for them, and for any written disclosure of supplier benefits the franchisor receives (regulation 2(2)(c)); check your confidentiality clause first.
• The books. Two years of clean financials that match the turnover you declared for royalties.

Goodwill needs care: the trade marks are the franchisor's, and what part of the outlet's goodwill is yours to sell turns on the agreement's terms on goodwill, termination and assignment (regulation 2(3)(v)). Read that clause before you set a price.

When we appraise a business, we look at the financials, the lease, the asset register and the staff complement, and tell you what a buyer is likely to pay and why. For a written valuation of the plant, equipment or vehicles, see valuations.

Your staff and section 197

Section 197 of the Labour Relations Act applies where the outlet is in fact transferred as a going concern, whatever the sale agreement calls it: the Constitutional Court has held that this turns on substance, not form (NEHAWU v University of Cape Town, para 56). Where it does, unless a different arrangement is agreed in writing under section 197(6) with the consulting party named in section 189(1) (depending on the workplace, whoever a collective agreement requires you to consult, a workplace forum, a registered union, or the affected employees or their nominated representatives):

• the buyer is automatically substituted as employer in every contract of employment in existence immediately before the transfer, and anything done before it, including a dismissal, is treated as done by the buyer;
• service is continuous, and different terms are allowed only if, on the whole, not less favourable (not where a collective agreement sets conditions).

You and the buyer must value, at the transfer date, accrued leave pay, the severance pay due on a retrenchment and other accrued amounts; agree in writing who is liable; and disclose those terms to each transferred employee (section 197(7)). For 12 months after the transfer you stay jointly and severally liable for those amounts if a transferred employee is retrenched or the buyer is liquidated or sequestrated, unless you show you complied (section 197(8)). Separately, you and the buyer are jointly and severally liable for any claim concerning a term or condition of employment that arose before the transfer, and the 12-month limit does not apply to it (section 197(9)). A dismissal because of the transfer is automatically unfair (section 187(1)(g)). Source: the Labour Relations Amendment Act 12 of 2002, in force since 1 August 2002 (gov.za).

Ask a labour attorney whether section 197 applies before you tell your staff. If the franchisee is insolvent, or a compromise is being entered into to avoid winding-up or sequestration for reasons of insolvency, section 197A applies instead (it is explained in buying assets from a company in business rescue).

VAT: when the sale is zero-rated

If you are a VAT vendor, selling the outlet would normally carry VAT at the standard rate, currently 15%, in force since 1 April 2018 (SARS: VAT). Section 11(1)(e) of the VAT Act zero-rates the sale of an enterprise as a going concern, but only if every requirement is met (SARS Interpretation Note 57):

1. seller and buyer are both VAT vendors (a buyer not yet registered must have applied before the agreement is concluded);
2. what is sold is an enterprise, or a part capable of separate operation;
3. the parties agree in writing that it is sold as a going concern and, when they conclude the agreement, that it will be income-earning on the date of transfer;
4. the assets necessary to carry it on pass to the buyer;
5. when they conclude the agreement, they agree in writing that the price includes VAT at the zero rate.

You must hold the signed agreement, a tax invoice and the buyer's VAT notice of registration within 90 days of the earlier of the invoice or the first payment, or account for VAT out of the price (SARS Interpretation Note 31, Issue 5, 17 July 2026). As SARS advises, provide in the agreement for VAT at the standard rate if the buyer turns out not to be a vendor. More: selling a business as a going concern.

The lease, your company and your creditors

• The lease. If you hold it, the landlord's consent is usually needed to cede it to the buyer; otherwise the buyer signs a new lease. If you signed a personal suretyship for the lease or to the franchisor, get a written release.
• A company selling its outlet. If the outlet is all or the greater part of a company's assets or undertaking, the disposal needs a special resolution of its shareholders (sections 112 and 115 of the Companies Act 71 of 2008), unless an exemption applies, such as an adopted business rescue plan.
• Creditors. If a trader transfers a business, its goodwill or goods forming part of it outside the ordinary course without advertising the intended transfer in the Government Gazette and in two issues each of an Afrikaans and an English newspaper circulating in the district, 30 to 60 days before the transfer, the transfer is void against the trader's creditors for six months, and against the trustee if the estate is sequestrated in that time (Insolvency Act 24 of 1936, section 34(1)). Once the notice is published, a creditor can demand immediate payment of a liquidated debt of the business that is not yet due (section 34(2)), so plan to settle such debts from the price.
• If the franchisee has died. The transfer clause must cover the estate too (regulation 2(3)(h)). The estate can be dealt with only under letters of executorship or a direction by the Master (section 13(1) of the Administration of Estates Act 66 of 1965), and, unless that is contrary to the will, the executor sells on terms the heirs approve in writing or, if they cannot agree or an heir is a minor, absent or under curatorship, as the Master approves (section 47). See our deceased and insolvent estates work.

Keeping the sale confidential

An outlet for sale is vulnerable: staff look elsewhere, competitors tell your customers, suppliers tighten credit. Release information in stages:

1. The franchisor first, before any marketing and in the way your agreement requires.
2. Anonymous marketing: sector, region and broad numbers. In a small network the brand and the suburb together identify you, so leave one out.
3. A signed non-disclosure agreement before the information pack.
4. Proof of funds before the books.
5. Full due diligence once terms are agreed.

Check your agreement's confidentiality clause before you share anything the franchisor owns or supplies, such as the operations manual or supplier pricing. See how a confidential business sale works.

Selling on auction or by private treaty

We sell franchised businesses, a single outlet or a group, with the franchisor's consent process handled as part of the sale.

Private treaty suits businesses that need a long due diligence or franchisor approval, and deals with staged payments or a handover period. The business is marketed without its name, and only buyers who have signed the non-disclosure agreement learn it and receive the information pack; the deal is then negotiated with one qualified buyer, subject to the franchisor's consent.

Auction with a reserve suits sellers who need a firm date: retirement, emigration, a deceased estate, business rescue or liquidation. Because the buyer is only known on the day, the groundwork comes first: the franchisor's approval criteria, training and transfer costs in the information pack, ideally with the franchisor ready to assess registered bidders; the franchisor's consent, going concern and VAT terms in the conditions of sale, including what happens if the franchisor does not approve the successful bidder; and the section 197(7) valuation. Bidders do their due diligence before they bid, and one who wants the zero rate should be registered for VAT, or have applied, before bidding (SARS Interpretation Note 57). A public auction may name the business in the catalogue; the non-disclosure agreement then protects the information pack and the books, so plan what you tell your staff before the catalogue goes out. The reserve is your floor: see the reserve price explained.

Either way, we recommend a route on the first confidential call and say why, the choice stays yours, and what selling costs is set out in writing before you sign: see business sales.