You are buying an established franchise, and a substantial part of the purchase price is allocated to goodwill. Then you read the franchise agreement, which says goodwill belongs to the franchisor.
Or you are opening a new franchise and expect to spend years building its customer base and local reputation. Who will own the value you create?
These are sensible questions. The answer depends on the franchise agreement, the nature of the business and what happens when the franchise ends.
What are you paying for when buying an existing franchise
The goodwill component of an existing franchised business is generally subject to the franchise agreement.
You may be paying for established customer relationships, trading history and the opportunity to continue earning income under a recognised brand. But your right to exploit that value depends on the franchise rights granted to you, including their duration.
In many cases, the purchase does not transfer ownership of the brand goodwill. You receive a contractual right to use the brand and systems and benefit from their goodwill during the franchise term.
That distinction matters. Paying a substantial goodwill amount to the seller does not necessarily give you a permanent right to that goodwill, a right to continue operating after expiry, or an entitlement to recover the amount when you leave.
The sale agreement and franchise agreement need to be read together to establish what the price buys.
What goodwill might you build yourself
A franchise business benefits from the brand’s reputation, trade marks, systems and customer recognition. The franchisor will generally seek to protect those interests.
The local operation may also develop value through its location, customer relationships, profitability and the franchisee’s efforts. Those sources of value can overlap.
For a new or greenfield franchise, there may be no established local business goodwill to purchase. Instead, you invest in establishing the business and developing its reputation. The agreement may nevertheless allocate the resulting goodwill to the franchisor.
Do not assume that creating the value means you will own it or receive compensation for it on exit. Check how the agreement deals with goodwill during the term, on sale and when the franchise ends.
Bringing your own clients into a professional services franchise
The position deserves particular attention where you bring an existing client base into a professional services franchise.
For example, you might join a recruitment, accounting or consulting franchise with clients and relationships developed before joining the network. A broad goodwill clause could fail to distinguish those existing relationships from goodwill associated with the franchise.
Consider seeking an express carve-out for your pre-existing business goodwill and client relationships, supported by a schedule identifying the relevant clients.
The amendment should also address what happens when client details are entered into the franchisor’s database. Recording information in a shared system should not leave the parties’ intended rights unclear.
This requires more than changing the goodwill clause. Review the definitions of intellectual property and confidential information, database rights, post-term obligations and restraints. A goodwill carve-out may offer little practical protection if other clauses prevent you contacting those clients or using the records after exit.
Any arrangement must also account for privacy obligations and the clients’ freedom to choose their service provider.
For a premises-based franchise the term matters
For a café, gym, salon or retail franchise, much of the business’s value may depend on continuing to trade at the site under the brand.
Whether buying an existing outlet or establishing a new one, assess the investment against the secure franchise and occupation terms. Include the purchase price, fitout, equipment and any anticipated refurbishment.
Is the term sufficient to provide a reasonable opportunity to earn a return? Are renewal rights available, and what conditions attach to them?
You cannot assume you will be permitted to operate beyond the franchise term. A renewal may involve a new agreement, additional fees, refurbishment or landlord approval.
A valuable location and an impressive trading history do not resolve a short or uncertain operating term.
Selling the business is different from the franchise ending
While the franchise continues, an approved buyer may pay for its established trading position, customer base and profitability, subject to obtaining franchise and occupation rights.
The position may change substantially on expiry or termination. Your rights to the name, systems and branding may end. You may have to vacate the site, remove signage and return or delete business information.
Restraints may also limit your ability to operate a competing business, approach customers or recruit staff.
Review how those restrictions interact with goodwill, intellectual property and confidential information provisions. What can you sell during the term, and what can you retain or use afterwards?
A right to receive goodwill as part of an approved sale is different from an obligation requiring the franchisor to compensate you when the agreement ends.
A purchase option or valuation is not a guaranteed exit
Some agreements give the franchisor a first opportunity to purchase the business or an option to acquire assets on termination.
Does that mechanism cover a going concern, or only equipment, stock and fitout? Does it include goodwill? Can the franchisor decline?
An independent valuation can help determine value, but its purpose must be clear. It might set a binding price for a franchisor purchase, calculate compensation or simply inform third-party sale negotiations.
A future purchaser is not automatically bound by the valuation mechanism in your franchise agreement. Nor does a valuation guarantee a buyer or the price ultimately achieved.
If an exit arrangement is important to your investment decision, document its triggers, scope and pricing mechanism before signing.
What does the Franchising Code say about goodwill
The Franchising Code of Conduct does not create a universal right to a goodwill payout whenever a franchise ends.
Early termination compensation: Section 43 requires applicable agreements to provide compensation where early termination results from the franchisor withdrawing from Australia, rationalising its Australian networks or changing its Australian distribution models. The calculation must address loss of opportunity to sell established goodwill and other prescribed losses.
Restraints after non-renewal: Sections 42 and 67 restrict post-term restraints where specified conditions are met. These include a qualifying renewal request, compliance with renewal conditions, the franchisor declining renewal, and either no contractual right to goodwill compensation or a claim resulting in merely nominal compensation. They do not invalidate every restraint.
Return on investment: Section 44 requires applicable agreements to provide a reasonable opportunity to make a return during the term on investment required by the franchisor. It does not guarantee profitability, renewal or a resale price. Sections 43 and 44 apply to agreements entered into, transferred, renewed or extended on or after 1 November 2025.
Schedule 1, item 18 also requires disclosure about goodwill compensation and end-of-term arrangements.
Make the agreement reflect the business you are bringing or buying
Before signing, establish what goodwill you are paying for or contributing, how long you can exploit it, and what happens on sale or exit.
For some businesses, the priority is adequate tenure. For others, it is protecting an existing client base. The drafting should reflect those differences across the goodwill, restraint, intellectual property and confidential information provisions.
At Magnolia Legal, I advise franchisors and franchisees on new franchise grants and existing business purchases. Reviewing the documents together helps identify whether the rights granted—and the proposed exit arrangements—match the commercial deal.