In a franchise territory sale, the headline consideration is agreed in the heads of terms — but the final amount the seller receives at completion is affected by the financial position of the territory at the completion date, by outstanding royalty and fee obligations to the franchisor, and (where applicable) by the vendor loan structure. Understanding how completion mechanics work helps sellers avoid unexpected deductions at the final stage.
Locked-Box vs Completion Accounts
Locked-box. The price is fixed by reference to an agreed set of accounts at a specific reference date. After that date, no price adjustment is made for changes in working capital or net debt, unless the buyer can demonstrate that value was extracted by the seller without authorisation. Many franchise territory transactions — particularly those involving individual buyers — use a fixed-price approach that functions similarly to locked-box: the price is agreed on the EBITDA at the marketing stage and is not adjusted at completion for working capital movements.
Completion accounts. The price is adjusted at completion based on the actual financial position compared to a target level agreed in the territory sale agreement. Completion accounts are more commonly used where a network investor or corporate buyer is acquiring the territory and their SPA template requires a working capital reconciliation.
Where a completion accounts mechanism applies, sellers should ensure they understand the working capital definition in the SPA and have appropriate financial advice on its application.
Outstanding Royalties and Franchisor Fees
The most important financial item to address at completion in a franchise territory sale is the position with the franchisor. Any outstanding royalties (management service fee), marketing levies, or other franchisor fees that are unpaid at the completion date will be deducted from the seller’s proceeds.
Pre-completion royalty clearance. Before the completion date, sellers should:
- Request a formal confirmation from the franchisor of the outstanding balance owed
- Ensure that any outstanding invoices are paid or accounted for in the completion statement
- Confirm that the franchisor transfer fee amount has been agreed and is reflected in the net proceeds calculation
A surprise royalty deduction at completion — where the franchisor confirms an amount owed that differs from the seller’s records — can affect the final proceeds. Reconciling the royalty position with the franchisor before the completion date avoids this.
Working Capital in a Franchise Territory
For service-based franchise territories, working capital consists of:
Current assets:
- Trade debtors — client invoices issued but not yet paid at the completion date. The level of debtors at completion depends on the invoicing cycle and the collection period.
- Work in progress — where the territory operates on a time-and-materials or project basis, work undertaken before completion but not yet invoiced creates a work-in-progress asset. The SPA should address how pre-completion WIP is valued and treated.
- Prepaid expenses — insurance, software licences, and other costs paid in advance for periods extending beyond completion.
Current liabilities:
- Trade creditors — amounts owed to suppliers and contractors.
- Accrued expenses — staff holiday pay accruals, accrued wages, and outstanding expense claims.
- Accrued royalties — management service fees and marketing levies that have accrued but not yet been invoiced by the franchisor.
- Deferred income — where clients have paid in advance for work not yet delivered, the unearned portion is a liability.
The Franchisor Transfer Fee in the Net Proceeds Calculation
The franchisor transfer fee is a cost of the transaction, not a completion accounts item — it is typically an agreed fixed percentage (five to ten percent of the sale price) payable to the franchisor on completion. It should be accounted for in the seller’s net proceeds model from the outset.
The transfer fee is usually settled directly from the completion payment — the solicitors hold the consideration and distribute the transfer fee to the franchisor, the broker fee to the broker, and the net balance to the seller. Sellers should confirm the mechanics with their solicitor in advance of the completion day.
Vendor Loan: The Completion Day Cash Position
Where the transaction includes a vendor loan, the completion day cash position requires careful planning:
- The seller receives the completion payment (consideration less transfer fee, broker fee, and any working capital adjustment).
- The vendor loan principal is treated as received at completion for CGT purposes — the seller must pay CGT on the full consideration (including the loan amount) in the completion year.
- The loan principal is not received in cash until the buyer repays it — the seller funds their CGT liability from the completion payment alone.
Sellers should model this cashflow explicitly before the completion date to ensure the completion payment is sufficient to cover the CGT liability and any other completion costs without the vendor loan cash.
Net Debt at Completion
Where the territory sale agreement includes a net debt adjustment:
- Cash balances at completion are typically included as a positive adjustment (the seller leaves cash in the business, which the buyer receives — the seller is paid for it)
- Borrowings, director loan accounts, and any outstanding tax liabilities are debt-like items that reduce the net proceeds
The SPA will define what constitutes “net debt.” Sellers should review this definition carefully — items that the seller considers ordinary course liabilities may be treated as debt by the buyer’s accountants.
How Sellers Can Protect Their Position
Reconcile the franchisor position before completion. Obtain written confirmation of all outstanding royalties, fees, and the transfer fee amount before the completion date.
Clear outstanding client invoices before completion. Invoicing promptly in the weeks before completion reduces debtor balances and can improve the working capital position where a completion accounts mechanism applies.
Understand the vendor loan cashflow. If accepting a vendor loan, model the completion day cash position — completion payment less transfer fee, broker fee, and CGT — to confirm it is sufficient without the loan cash.
Instruct franchise transaction solicitors. The interaction between the franchise agreement assignment, outstanding royalty settlement, TUPE obligations, and working capital requires advisers who have handled franchise territory sales specifically.
For a full guide to the franchise territory sale process, see how to sell a franchise business in the UK. For a guide to the sale agreement, see understanding the franchise territory sale agreement.
Contact our team for a confidential discussion about selling your franchise territory