4 Things to Know About Franchise Escrow

What makes a franchise resale different from a regular business sale? The franchisor. In a standard asset sale, the buyer and seller negotiate directly and close when they are ready. In a franchise resale, the franchisor holds a veto. The buyer must be approved. The franchise agreement must be assigned. The training must be completed. This third-party involvement creates unique risks that standard business escrow does not address. At Secured Trust Escrow, we have administered franchise escrows for restaurants, auto shops, retail stores, and service franchises. Here are the four things every franchise buyer and seller needs to know.

1. Franchisor Approval Is a Condition Precedent

The franchisor must approve the buyer before the sale can close. This is not a formality. The franchisor will review the buyer’s financials, background, credit history, and business experience. They may require the buyer to attend training, pass a test, or remodel the location before granting approval. The escrow instructions must include franchisor approval as a condition precedent to closing. The escrow company holds the buyer’s deposit while the franchisor conducts its review. If the franchisor rejects the buyer, the escrow company returns the deposit to the buyer, minus any cancellation charges specified in the instructions. If the franchisor approves the buyer, the escrow proceeds to closing. The seller cannot force the franchisor to approve a buyer, and the buyer cannot demand the deposit back if they fail to meet the franchisor’s requirements. This makes franchisor approval the single most important contingency in the transaction.

2. The Franchise Agreement Must Be Properly Assigned

The franchise agreement is a personal services contract between the franchisor and the franchisee. It is not automatically transferable. The seller must obtain the franchisor’s consent to assign the agreement to the buyer. The escrow company coordinates this assignment by holding the signed assignment documents, confirming that the franchisor has approved the assignment, and ensuring that the buyer signs the new franchise agreement or an assumption agreement. The escrow instructions should specify exactly which documents are required: the assignment of franchise rights, the franchisor’s consent letter, the buyer’s signed franchise agreement, and any required training certificates. The escrow company does not release funds until all these documents are in place. If the assignment is incomplete, the buyer may be operating the business without a valid franchise agreement, which exposes them to termination by the franchisor.

3. Transfer Fees and Required Improvements Are Escrowed

Most franchisors charge a transfer fee when a franchise is sold. This fee can range from a few thousand dollars to a percentage of the sale price. The franchisor may also require the seller or buyer to make improvements to the location before the transfer is approved, such as updating signage, replacing equipment, or remodeling the interior. The escrow instructions should specify who pays the transfer fee and who funds the required improvements. The escrow company can hold funds for these obligations and pay the franchisor or the contractor directly upon verification that the work is complete. This prevents disputes over who owes what and ensures that the franchisor’s conditions are satisfied before closing. If the improvements are not completed, the franchisor may withhold approval, and the escrow company will not release funds until the issue is resolved.

4. The Escrow Timeline Is Longer Than a Standard Asset Sale

A standard business sale might close in 60 days. A franchise resale often takes 90 to 120 days because of the franchisor’s approval process. The buyer submits their application. The franchisor reviews it for 2 to 4 weeks. The franchisor requests additional documents. The buyer provides them. The franchisor schedules training. The buyer attends training for 1 to 2 weeks. The franchisor issues final approval. Only then can the escrow company schedule closing. The escrow instructions must account for this extended timeline. The deposit should be large enough to keep the buyer committed through the process. The closing date should be flexible or tied to franchisor approval rather than a fixed calendar date. The escrow company should send regular updates to both parties so they know where the franchisor stands and what remains to be done. Rushing a franchise escrow is a mistake. The franchisor’s timeline is not negotiable, and the escrow company cannot close without their approval.

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