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Who owns the goodwill?

The basic premise of franchising is that the good will is, and remains that of the franchisor. The franchisee trades under the franchisors licence, brand and system. The franchisee is granted a licence (a contractual right) to operate the business under that brand and system.

The goodwill at the end of the franchise term remains with the franchisor.

Any goodwill that a franchisee may recover on a sale will depend on:

(a) Whether the value of the franchise system as a whole has increased over time that is if it is a successful growing brand, it will attract interest and great value in the market;

(b) Whether the individual franchise business is profitable.

The Vendor may ask a multiple of the profit based on the previous years net profit or the average of the last 2 or 3 years net profit, or a multiple of 3 to 5 times of the EBIT ## before income and tax over the previous 3 to 5 years.

There are other valuation models, however the main indicator of value will be the past 12 months performance.

At the end of the franchise term the licence and rights end. The only obligation on the franchisor is to pay the franchisee the depreciated or written down value of the franchisees plant and equipment and stock. There is no goodwill.

There is no obligation on the franchisor to buy back the business from the franchisee or recognise any good will that may have been built by the franchisee over time. This is due to the initial premise that the goodwill is that of the franchisor.

Robert Toth | Franchise Partner | Corporate & Commercial | Wisewould Mahony
p +61 3 9612 7297| f +61 3 9629 4035
[email protected] |