Preparing Your Franchise for Sale
by Ed Teixeira
As a franchisee, there will come a time when you decide to sell your franchise. If you’re like most small to medium independent business owners the decision to sell will be based upon one or more of the following reasons:
- You suffer "burnout." In fact the average life span of a small business is four years.
- Operating the franchise is no longer enjoyable.
- The value of the business is at a high level.
- Competitive factors threaten your sales.
- There are extenuating circumstances, such as a personal or family illness.
Unlike other business owners, franchisees have certain restrictions regarding the sale of their franchise. The fact that the franchise business can only be sold as a franchise can limit potential buyers compared to selling an independently owned business. This makes a compelling case for making sure that your franchise is prepared for sale.
Don’t Expect the Franchisor’s Help
In Selling your Business
Franchisors retain strong contractual rights regarding the sale and assignment of a franchise. These rights include: approving the buyer, the purchase transaction and having a right of first refusal. Most franchisors take an “arms length” approach, when it comes to franchise resales. This lowers the risk that the franchisor will face claims of interfering with, or inhibiting the right of a franchisee to sell their business. Without an organized franchise resale program most franchisees must shoulder the responsibility to find a qualified buyer and complete the transaction. When you do decide to sell your franchise be sure to notify your franchisor since they will be involved in various stages of the sales process. Also, they may have a franchise prospect in their database that expressed an interest in your market area or territory.
A Brief Comment on Finding Buyers for your Franchise
You can use several options when it comes to locating potential buyers. If you decide to engage the services of a business broker you’ll be expected to pay a commission that represents from 8 to 12% of the sales prices. Most reputable business brokers will also have a minimum transaction fee of a least $10,000. Some franchisors will provide the name of business broker(s) to their franchisees. However, as a franchisee looking to sell it, will be your responsibility to find and contract with a business broker. National broker networks with a franchise expertise include VR Business Brokers and FranNet
If you wish to find buyers on your own, you can begin by listing your franchise on several Internet sites. A number of highly visited sites are bizbuysell.com, bizquest.com, businessnation.com. These sites are inexpensive and attract a great deal of traffic.
Important Items in the Sale Process to Prepare For
- Confirm if there will be a change in the royalty, advertising fees or other important items once the sale is completed. Since franchisors usually require a buyer to execute the current form of franchise agreement, there may be new terms that can negatively impact the future profitability and sales price of the franchise.
- Advise and utilize the services of your accountant and attorney. You’ll need their expertise in valuing the business and dealing with any potential legal issues.
- If location is a key component of your franchise the terms of your lease can be a positive or negative factor depending upon the length and rent. Obviously a long term lease in a good location at a reasonable rent is a plus, while the converse can be a negative. Identify options with your landlord. Many landlords will not agree to a full assignment of the lease, since it limits their recourse.
- Changes in the competitive nature of the franchise can have an impact. Be prepared to answer questions regarding competition.
- Will the franchisor require the new franchisee to remodel the premises? Some franchise concepts, especially in the food segment will require the buyer to bring the premises up to current standards. Once again identify the possible requirements placed upon a new franchisee.
- Be in “good-standing” with your franchisor. A franchisee in default of their franchise agreement that attempts to sell their franchise without an understanding from the franchisor could get into a “sticky” situation. If necessary, obtain advice and assistance from your franchise attorney.
- Have good financial records that are current and accurate. The majority of small business sales fail because the financial statements fail to confirm owner income, operating expenses and future earnings potential.
- Be realistic and honest regarding the value of your franchise business. Most small business owners tend to err on the side of setting a higher sales price than the financials can support. On a related issue don’t rule out financing part of the sale price. If you do provide some financing be sure your attorney includes the necessary protection in your sales agreement.
Making the decision to sell your franchise is an important decision and requires careful preparation before listing for sale. Make sure you obtain the advice of professionals before and during this important activity.
Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at email@example.com