Franchise business resales: valuation and transfer

What to take away

What actually transfers when a franchise territory is sold

A resale is not one asset. It is a bundle: the right to trade under the brand in a defined area, the equipment and shopfit, the stock, the customer list, the lease or premises interest, and the staff.

The franchise agreement transfer clause decides what can move and on what terms. Some agreements allow a transfer to a buyer the franchisor approves. Others give the franchisor a right of first refusal, or a right to buy back the territory at a formula price.

Read that clause before you market the business. If it says the franchisor can refuse consent unreasonably, you have more room. If it says consent is at the franchisor's absolute discretion, your buyer pool is whatever the franchisor will accept.

Assets fall into two groups. Chargeable assets, such as goodwill, fixtures and the lease, sit in the capital gains calculation. Trading assets, such as stock, are dealt with as a trading transaction and taxed as income.

If the franchisee trades through a limited company, the buyer may prefer a share purchase. That keeps contracts and licences in place but brings the company's history, including any liabilities. An asset purchase is cleaner for the buyer and usually simpler for the seller's capital gains position.

Companies House records the legal entity, its directors and its filings, so a buyer can check the seller's company before exchange. You can search the Companies House register using its Find and update company information service.

Where a network is under financial strain, a resale can turn into a restructuring or insolvency matter. The Insolvency Service is relevant if the franchisor or a fellow franchisee fails. See The Insolvency Service's company insolvency guidance.

Building a resale valuation from trading history and territory evidence

A franchise resale valuation starts with the profit the territory actually makes, adjusted for what a buyer would have to pay to run it.

Take three years of accounts and tax returns. Add back the seller's own salary if the buyer will replace it, one-off legal costs, and any personal expenses run through the business. Then deduct a market-rate manager's salary if the buyer will not work in the business full time.

The result is maintainable earnings. Most small franchise resales are priced as a multiple of that figure, often between two and four times, depending on the brand, the lease and how transferable the customer base is.

Territory evidence supports the multiple. Show the postcode area, the number of active customers, repeat purchase rates, and any exclusivity the franchisor grants. A territory with a long lease near a growing population is worth more than one on a short lease in a declining catchment.

Use the franchise return on investment method to test the price from the buyer's side. A simple payback calculation is total investment (price, transfer fee and working capital) divided by annual maintainable earnings available to the buyer. Simple ROI is annual maintainable earnings divided by total investment, multiplied by 100. These are starting-point calculations, before tax, finance costs or changes in trading.

Here is a worked example.

A cleaning franchise in the West Midlands turns over £180,000 a year. After the owner's replacement salary and adjustments, maintainable earnings are £45,000. The seller asks three times earnings, or £135,000, plus stock at valuation. On the asking price alone, £135,000 divided by £45,000 gives a simple payback of three years; the transfer fee and working capital would increase the investment and payback period.

The buyer checks the territory: 240 regular customers, an average contract life of four years, and a five-year lease with a break at year three. The multiple holds because the customer base is sticky and the lease is long enough to recover the investment.

If the same business had 80 customers and a rolling monthly contract, the buyer would push for two times earnings or walk away. Territory quality, not turnover alone, sets the multiple.

Goodwill, fixtures, stock and the franchise agreement's transfer clause

Goodwill is the part of the price that reflects the brand, the customer relationships and the territory's reputation. It is usually the largest component and the one HMRC watches most closely.

Fixtures and equipment are valued at market value, not book value. A five-year-old oven or a van is worth what someone will pay for it, and the buyer will want a schedule listing each item.

Stock is counted at completion, usually at cost. Agree the counting method in advance, ideally with an independent stocktaker, and set a cap so the buyer is not funding a warehouse of slow-moving items.

The franchise agreement transfer clause governs all of this. It sets the consent process, the transfer fee, any training the buyer must complete, and whether the seller must stay on for a handover period.

Some agreements require the buyer to sign a new agreement on the franchisor's current terms. That can change the royalty rate, the territory boundary or the renewal rights. Read the new form before you agree a price.

Get the contract set reviewed before heads of terms. A sale involves the transfer deed, the new franchise agreement, the stock and asset schedules, the lease assignment and the employment transfer documents. These are the sort of contracts around a franchise purchase that deserve separate legal reading, not a single signature page.

HMRC capital gains rules on a territory sale

HMRC capital gains rules apply to the chargeable assets you dispose of: goodwill, fixtures, the lease, and any intellectual property you own personally.

A gain is the disposal proceeds minus the acquisition cost and allowable improvement costs. If you bought the franchise for £60,000 and sell the goodwill and fixtures for £140,000, the gain before reliefs is £80,000, less any capital spent on improving the territory.

If you trade as a sole trader or partnership, you pay Capital Gains Tax through Self Assessment. If you trade through a company, the company pays Corporation Tax on its chargeable gains and reports them in the Company Tax Return. The overview at Company Tax Returns: Overview - GOV.UK sets out the filing route.

Stock is not a chargeable asset. It is trading stock, and the profit on it is taxed as income, not capital. Keep the stock valuation separate from the goodwill figure in the sale agreement.

VAT can apply to the sale of business assets. The transfer of a business as a going concern rules may treat the sale as outside the scope of VAT if the buyer continues the same kind of business and meets the conditions.

For VAT, HMRC's VAT Notice 700/9, Transfer of a business as a going concern, explains the conditions and treatment. Check the position with your accountant.

For capital gains reporting, individuals and partnerships use Self Assessment, while companies report chargeable gains through the Company Tax Return. HMRC's Company Tax Returns guidance sets out the company filing route.

Business Asset Disposal Relief and the conditions that must be met

Business Asset Disposal Relief reduces the Capital Gains Tax rate on qualifying gains when you sell or close a business. It is not automatic. You must claim it.

The relief applies to disposals of a business or shares in a personal company. For a franchise resale, the usual route is the disposal of the business assets, including goodwill, where you have owned the business for at least two years before the sale.

For shares, the company must be your personal company and a trading company, and you must have held at least 5 per cent of the shares and voting rights for two years. The company must be a trading company or the holding company of a trading group.

You must be an officer or employee of the company, or hold the shares as an employee, depending on the route. If the franchise trades through a company and you are a passive shareholder, the relief may not be available.

The relief is subject to a lifetime limit on qualifying gains. Check the current limit with your accountant before you rely on it, because it has changed over time and the figure at the date of disposal is what counts.

Claims are made through Self Assessment, usually by the 31 January following the tax year of the disposal. Late claims can lose the relief, so diarise the date at exchange, not at completion.

If the business is sold at a loss, the loss can be set against other gains in the same year or carried forward, subject to the usual rules. Take advice before assuming a loss is wasted.

Franchisor consent, fees and the handover period

The UK has no franchise-specific statute or statutory franchise register. The relationship is governed principally by the contract, especially the franchise agreement, alongside generally applicable law. Franchisor consent and fees are the gate you must pass before a sale completes. Most agreements require written consent, and most charge for it.

There is no standard UK transfer fee: the agreement sets the amount or how it is calculated, which may be a fixed sum or a percentage of the sale price. Ask the franchisor for the applicable figure in writing early, so it can be included in the buyer's budget.

The franchisor will vet the buyer: credit checks, references, interview, and sometimes a period of training. A buyer who fails vetting kills the deal, so introduce the buyer to the franchisor before you spend money on lawyers.

The handover period is usually a condition of consent, but there is no universal timetable. Check the agreement and agree the required dates and availability with the franchisor and buyer before completion. Include any time you must spend working in the business or being available by phone in your own planning and the buyer's working capital.

If the franchisor refuses consent, check the agreement for the grounds. Some agreements list them, such as a buyer without the right experience or funds. Others leave it open. If the refusal is unreasonable and the agreement says it must not be, you may have a claim, but litigation is slow and expensive.

Buyers should also look at the network as a whole. A franchise is only as strong as its franchisor and its fellow operators. The British Franchise Association (BFA) is a voluntary trade association, not a statutory regulator; prospective buyers can check its member directory, while recognising that membership is not a guarantee. The vendor due diligence for franchise systems process covers the legal identity, the support record and the exit pricing evidence.

Tax reporting, deadlines and records for the seller

Tax reporting deadlines depend on the asset. For UK residential property, the gain must be reported and any tax paid within 60 days of completion, using HMRC's online Capital Gains Tax on UK property service/account. This catches franchisees who sell a flat above the shop or a residential investment held alongside the business.

For other chargeable assets, the gain goes in the Self Assessment return for the tax year of disposal, with the balancing payment due by 31 January the following year. Payments on account may apply.

If the seller is a company, the gain goes in the Company Tax Return. Corporation Tax is then due nine months and one day after the end of the accounting period, unless the company is large enough to pay by instalments.

Keep the records that prove your figures: the original franchise agreement and entry fee invoice, accounts for the whole ownership period, the stock count sheets, the asset schedule, the completion statement, and the transfer fee invoice. HMRC can ask questions years later.

If you are selling because the business is failing, do not simply walk away. Directors have duties, and a disorderly exit can lead to personal liability. The Insolvency Service guidance is the place to start if the network or the company is in trouble.

Budget for the exit itself. There is no single reliable cost figure: legal and accountancy fees depend on the transaction, and stocktaking or an early lease surrender may add costs. Obtain quotes and confirm the franchisor's transfer fee and any lease costs before you market the business. Sellers who plan the budget for a franchise in England before they market the business avoid nasty surprises at completion.

One tax point to check before a resale

Before advertising, consider whether Business Asset Disposal Relief may apply to the disposal.

Common questions

Does the buyer take on my staff when I sell a franchise?

Usually yes, under the Transfer of Undertakings (Protection of Employment) Regulations, known as TUPE. The buyer inherits the contracts and continuity of service. ACAS publishes guidance on the consultation duties, and you should not assume you can make redundancies before completion.

Can I sell my franchise without the franchisor's consent?

No, not if the agreement requires it, which most do. A transfer without consent is a breach and can end the agreement. The buyer would then have nothing to trade with, and you would face a claim.

Is the original franchise entry fee part of the capital gains calculation?

The entry fee is usually part of your acquisition cost for the goodwill, so it can be deducted from the proceeds. Keep the invoice. If the fee included training or initial stock, your accountant may split it between capital and revenue.

What if the buyer wants to buy my company rather than the assets?

That is a share sale. You sell the shares, and the company keeps its contracts, employees and history. The buyer inherits any hidden liabilities, so expect deeper due diligence and possibly a warranty and indemnity insurance policy.

Do I pay Capital Gains Tax on the stock?

No. Stock is trading stock, and the profit on its sale is taxed as income. Only the chargeable assets, such as goodwill, fixtures and the lease, go into the capital gains calculation.

How long does a franchise resale take?

Typically three to nine months from first enquiry to completion, depending on the franchisor's vetting, the lease and the buyer's funding. A buyer who needs a commercial mortgage will add time to the process.