A buy-sell agreement (also called a buyout agreement or shareholder agreement) is a legally binding contract between co-owners of a business that governs what happens to an owner’s interest when a triggering event occurs: death, disability, retirement, voluntary exit, or divorce. For franchise co-owners, the buy-sell agreement must be carefully coordinated with the franchise agreement’s transfer and approval requirements. A standard boilerplate buy-sell agreement drafted without reference to the franchise agreement may fail at exactly the moment you need it most.

This guide covers the triggering events your franchise buy-sell agreement must address, what makes franchise buy-sells different from general business buy-sells, how the purchase price should be determined, and how to fund the agreement so it works when triggered. At Lopes Law LLC, we draft franchise buy-sell agreements that are built around your specific franchise agreement’s transfer provisions.

What Triggering Events Should a Franchise Buy-Sell Agreement Cover?

The triggering events in a buy-sell agreement define when the agreement activates and one co-owner’s interest must be purchased by the others. For franchise businesses, the list of triggering events is longer than for a standard business because of the unique constraints the franchise agreement imposes.

Death

Death is the most commonly addressed triggering event. When a co-owner dies, the buy-sell agreement determines what happens to the deceased owner’s interest: does it pass to the estate, or must the estate sell to the surviving co-owner? For franchise businesses, the franchisor’s approval requirements and right of first refusal affect how this transaction proceeds. The buy-sell agreement must be designed to work within those constraints.

Permanent Disability

Permanent disability is often overlooked in buy-sell agreements, but for a franchise that requires active management, a co-owner who can no longer work in the business creates a serious operational and financial problem. The buy-sell agreement should define what constitutes permanent disability (typically defined by reference to disability insurance criteria: inability to perform material duties of the role for a period of 12 consecutive months, confirmed by a physician), the timeline for triggering the buyout, and how the purchase price is determined at that point.

Voluntary Exit

When a co-owner wants to leave voluntarily, the buy-sell agreement governs whether they can sell their interest to an outside party or must first offer it to the other co-owners. Most franchise buy-sell agreements include a right of first refusal in favor of the remaining co-owners: if you want to sell, you must offer your interest to your co-owners at the price you would accept from an outside buyer before going to the market. This protects the remaining co-owners from having an unknown third party forced on them as a co-owner.

Divorce

Divorce is a triggering event that many franchise co-owners fail to anticipate. Most franchise agreements prohibit non-qualifying individuals (including a divorcing spouse) from holding ownership interests in the franchisee entity. If a divorcing spouse is awarded a portion of a co-owner’s franchise interest in a property settlement, that transfer may violate the franchise agreement. The buy-sell agreement should address this scenario: typically, the co-owner must buy out the spouse’s awarded interest, keeping ownership within the group of qualified operators.

Bankruptcy

Bankruptcy of a co-owner typically triggers a termination provision in the franchise agreement (many agreements include bankruptcy as a ground for immediate termination). The buy-sell agreement should require the non-bankrupt co-owner to purchase the bankrupt co-owner’s interest before the bankruptcy trustee can sell it to an outside party. This protects the franchise relationship by keeping ownership within a set of qualified, approved operators.

Involuntary Exit and Default

If one co-owner’s actions (fraud, embezzlement, breach of fiduciary duty) cause harm to the business or trigger a default under the franchise agreement, the buy-sell agreement should provide for a forced buyout at a reduced price. This “bad actor” provision protects the remaining co-owners from being stuck in partnership with someone whose conduct has damaged the business or the franchise relationship.

How Is a Franchise Buy-Sell Agreement Different from a Standard Business Buy-Sell?

A buy-sell agreement for a general business focuses on the relationship between co-owners and is governed primarily by state corporate or partnership law. A franchise buy-sell agreement must also account for the franchise agreement’s transfer provisions, which create additional layers of complexity.

Franchisor Approval Requirements

Any transfer of ownership interests in the franchisee entity may require franchisor approval, even if the transfer is between existing co-owners. This is a critical point that many non-franchise attorneys miss when drafting buy-sell agreements. The buy-sell agreement must address how the franchisor’s approval will be obtained, what happens if the franchisor does not approve, and how the transaction timeline accommodates the franchisor’s review period.

Qualified Buyer Requirement

The person purchasing the departing co-owner’s interest must meet the franchisor’s qualifications. If a surviving co-owner already holds 100 percent ownership upon the death of a co-owner, the franchisor may still require confirmation that the surviving owner continues to meet qualifications. If the surviving co-owner does not meet qualifications independently (because they previously shared some of the qualification requirements with the departing owner), the franchise may be at risk.

Pricing Mechanism and ROFR

The buy-sell agreement’s pricing formula must be coordinated with the franchise agreement’s ROFR provisions. If the franchise agreement gives the franchisor the right to purchase the franchise at fair market value when any ownership change occurs, the buy-sell agreement’s pricing mechanism must account for the possibility that the franchisor exercises this right. A buy-sell agreement that assumes the transaction will close between co-owners without accounting for the ROFR may fail to work as intended.

At Lopes Law LLC, we review the specific franchise agreement’s transfer provisions before drafting any buy-sell agreement for a franchise co-owner relationship.

How Should the Purchase Price Be Determined in a Franchise Buy-Sell?

The purchase price mechanism is one of the most important and most contentious provisions in any buy-sell agreement. Disputes over valuation are the most common reason buy-sell agreements fail to work as intended when triggered. The goal is a pricing mechanism that is objective, predictable, and acceptable to all parties at the time of drafting (before anyone knows which side of the transaction they will be on).

Fixed Price Method

The parties agree on a price at signing and commit to reviewing and updating it annually. This is the simplest method to administer but carries the risk of becoming outdated if the parties fail to update it. A franchise that has grown significantly since the price was set, or that has experienced a material event (loss of a key location, system-wide royalty increase, pandemic disruption), may have a fixed price that is far from current value.

Appraisal Method

The purchase price is determined by an independent business appraiser at the time of the triggering event. This is the most accurate method but is also the most time-consuming. Appraisals for franchise businesses can take 30 to 60 days and cost $5,000 to $15,000. For triggering events that require fast resolution (death, bankruptcy), this delay may create problems. The buy-sell agreement should specify who selects the appraiser, how disputes over the appraisal are resolved, and what standard of value applies (fair market value, fair value, or going-concern value).

Formula-Based Method

The purchase price is based on a multiple of EBITDA, revenue, or trailing 12-month earnings. This is common in franchise contexts where financial performance metrics are regularly tracked and reported to the franchisor. A formula like “3x trailing 12-month EBITDA” provides a reasonably objective and current valuation without requiring a full appraisal. The formula must address how to treat owner compensation, how to adjust for one-time items, and whether the franchisor’s required remodel or technology updates affect the calculation.

Book Value

Book value is the simplest method to calculate, but it may not reflect the franchise’s market value or the value of goodwill. For a franchise with strong brand recognition, a long operating history, and favorable location, goodwill may represent 50 to 70 percent of total value. A book value pricing mechanism would significantly undervalue this asset, creating an incentive for the surviving co-owner to trigger the agreement at the expense of the departing co-owner.

How Is a Franchise Buy-Sell Agreement Funded?

A buy-sell agreement without a funding mechanism is little more than a promise. When a triggering event occurs, the remaining co-owner must have the resources to pay the agreed purchase price. Life insurance is the most reliable and tax-efficient funding mechanism for death-triggered buyouts.

Cross-Purchase Life Insurance

In a cross-purchase structure, each co-owner holds a life insurance policy on the other. The policy proceeds are paid directly to the surviving co-owner, who uses them to purchase the deceased co-owner’s interest. For a two-owner franchise, this requires two policies. For three or more owners, the number of required policies increases (n x (n-1) policies for n owners), which is why entity redemption is more common for larger groups.

A key advantage of cross-purchase: the surviving co-owner’s basis in the purchased interest is the insurance proceeds paid, which is typically close to fair market value. This provides a favorable step-up in basis that reduces capital gains tax if the surviving co-owner later sells the franchise.

Entity Redemption Life Insurance

In an entity redemption structure, the franchise entity holds life insurance policies on all co-owners. At a co-owner’s death, the entity receives the proceeds and uses them to redeem (purchase) the deceased co-owner’s interest from the estate. This is simpler to administer for three or more owners, but the tax treatment differs: the surviving co-owners do not receive a step-up in their basis, which may result in higher capital gains tax on a future sale.

Disability Insurance Funding

The death-funded component is straightforward because life insurance is readily available and inexpensive. The disability-funded component is more complicated. Disability buyout insurance exists specifically for buy-sell agreements triggered by permanent disability, but it is more expensive than life insurance and has more restrictive underwriting. The elimination period (typically 12 months of continuous disability before benefits begin) must match the disability trigger in the buy-sell agreement.

At Lopes Law LLC, we coordinate with insurance advisors when drafting buy-sell agreements to ensure the funding mechanism is properly aligned with the agreement’s triggering events and pricing mechanisms.

A Real Scenario: Eleven Months Without a Buy-Sell Agreement

Two co-owners of a retail franchise operated as equal 50/50 partners without a buy-sell agreement for 7 years. Their relationship was strong and the business was profitable. One co-owner was then diagnosed with a progressive neurological condition that eventually prevented her from working actively in the business. She could no longer meet the franchisor’s active management requirements, which required the qualifying operator to be involved in daily operations.

Without a disability buyout provision in any agreement, the parties spent 11 months in negotiation over the buyout price. The disability co-owner argued for fair market value based on an appraisal; the active co-owner argued for book value. When negotiation failed to produce agreement, the parties faced litigation over valuation. The litigation cost both parties more in legal fees and lost management focus than the entire difference in their valuation positions.

The franchise agreement’s active management requirement was also flagged by the franchisor during the 11-month period, creating a compliance concern that required a separate resolution. At Lopes Law LLC, we now routinely recommend that all multi-owner franchise entities execute a buy-sell agreement within 90 days of formation. The cost of a well-drafted buy-sell agreement is a fraction of the cost of resolving a triggering event without one.

What Should a Franchise Buy-Sell Agreement Always Include?

Based on our experience drafting and negotiating franchise buy-sell agreements, at Lopes Law LLC we have identified the provisions that are most often missing from standard buy-sell templates and most critical for franchise co-ownership situations:

A well-drafted franchise buy-sell agreement typically runs 15 to 25 pages and costs $1,500 to $3,000 in legal fees to prepare. That is a fraction of the cost of resolving a triggering event without one. Anthony Lopes, Esq. has drafted buy-sell agreements for franchise co-owners across food service, home services, fitness, and healthcare franchise systems.

• All triggering events explicitly defined, including death, disability (with clear definition), voluntary exit, divorce, bankruptcy, and termination for cause
• Coordination with franchisor ROFR: a provision addressing what happens if the franchisor exercises its transfer ROFR when the buy-sell is triggered
• Qualified buyer requirement: confirmation that the purchasing co-owner must continue to meet franchisor qualifications after the purchase
• Pricing mechanism: clear and objective formula with provisions for updating it periodically
• Funding mechanism: confirmation of life insurance and disability insurance policies that fund the agreement, with obligations to maintain coverage
• Transition provisions: obligations regarding management transition, employee notification, and franchisor notification upon trigger
• Non-solicitation: restrictions on the departing co-owner from soliciting employees or customers of the franchise after the buyout

For the broader succession planning context, see our guide on Franchise Succession Planning: Protecting Your Business Legacy. For estate planning for franchise owners including how buy-sell agreements interact with trusts and powers of attorney, see Estate Planning for Franchise Owners: What Happens to Your Franchise When You Die?.

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