How To Sell a Franchise

Selling franchises differs significantly from a traditional business due to the intricate structure and contractual obligations inherent in franchise agreements.

Unlike a traditional business sale, transferring a business in the franchise industry includes not just the business itself, but also the rights to use the franchisor's brand name, intellectual property and trademarks, and business model.

It doesn’t always come easy because the exit strategy is subject to the terms and conditions specified in the franchise agreement. Franchise resale requires approval from the franchisor, who may impose specific provisions for the new franchise owner to protect the franchise brand. Additionally, selling to a prospective franchisee also requires a transition period. During this time, the new owner receives training and support to ensure a smooth continuation of operations.

Restrictions on Franchise Sales

Franchise sales are often subject to various restrictions that protect the integrity of the franchise system. These restrictions can include:

• Franchisor Approval: The franchisor may have specific standards that the potential buyer must meet. Franchisees are subject to strict brand standards and guidelines set by the franchisor. Before approval, the franchisor may assess whether the potential buyer can maintain these standards.
• Training and Transition: Franchise sales often involve a transition period during which the new owner receives training from the franchisor. The business owner may require the buyer to complete certain training programs to ensure they understand and can uphold the franchisor's standards.
• Transfer Fees: Franchise agreements may include provisions for transfer fees payable to the franchisor upon the sale of the franchise. These fees are meant to compensate the franchisor for administrative costs associated with processing the sale and transferring the franchise rights.
• Non-Compete Clauses: Franchise agreements commonly include restrictions that prevent the franchisee from operating a similar independent business or franchise unit within a certain geographic area.
• Disclosure Requirements: Franchise laws require franchisors to provide prospective buyers with a Franchise Disclosure Document (FDD) containing essential information about the franchise opportunity, including the terms of the franchise agreement, fees, and other pertinent details.

Can the Franchisee Choose Who Buys the Business?

Ultimately, the ability to sell a franchise business isn’t that easy. The process is governed by the specific terms of the franchise agreement and any applicable laws or regulations. The franchisor often reserves the right of first refusal, meaning they can purchase the business before it is offered to external buyers.

The franchisee's ability to choose a franchise buyer is restricted to individuals or entities approved by the franchisor and involves navigating various contractual obligations and associated fees.

Sell a Franchise in Six Steps

1. Determine Value

Before selling a franchise, determine its value. Assess factors such as revenue, profit margins, brand reputation, market demand, and the overall financial health of the franchise. Valuation methods commonly used include income-based approaches, market-based approaches, and asset-based approaches.

2. Set an Asking Price

Based on the determined value and market conditions, set an asking price. This price should be competitive, yet reflect the franchise's worth. It's important to consider the financial aspects and the intangible value associated with the brand and ongoing support from the franchisor.

3. Identify Buyers

Once the asking price is set, identify potential buyers. This may involve reaching out to existing franchisees or seeking referrals, advertising through relevant channels, or working with business brokers specializing in franchise sales. Prospective buyers should be vetted to ensure they have the financial means and skills to run the franchise successfully.

4. Prepare and Market for Sale

Preparing the franchise for sale involves gathering financial statements, franchise agreements, and operational manuals. Showcase the strengths and opportunities driven by the franchise marketing strategy to showcase how visibility has increased the customer base.

5. Conduct Due Diligence

Both the seller and the new franchisor should engage in due diligence to verify the accuracy of the information provided and assess potential risks. This involves reviewing financial records, legal documents, and franchise agreements as well as conducting site visits. Thorough due diligence helps mitigate risks and facilitates a smooth ownership transition.

6. Negotiate and Close

Once due diligence is completed satisfactorily, negotiations on the terms of the sale begin. This includes finalizing the purchase price, payment terms, transition period, and contingencies. Negotiations aim to reach a mutually beneficial agreement for both parties. Once the terms are agreed upon, legal documents are drafted, and the sale is closed, officially transferring franchise ownership.

When to Assemble a Team of Advisors

Enlisting a team of advisors can be beneficial at various stages of selling a franchise, depending on the complexity of the transaction and your expertise. Generally, you should involve advisors early as franchise sales involve significant legal, financial, and operational considerations.

Advisors include:

• Franchise Consultants and Franchise Brokers: Franchise consultants provide strategic advice on franchise development, operations, and growth strategies. They can offer insights into maximizing the value of the franchise before sale. On the other hand, franchise brokers focus specifically on facilitating the sale of existing franchises. They assist with marketing, identifying potential buyers, and negotiating the sale terms.
• Attorneys: Legal advisors, particularly those with experience in franchise law, play a crucial role in navigating the complex legal aspects of franchise sales. They can review franchise agreements, draft sale contracts, and ensure compliance with relevant laws and regulations.
• Accountants: Financial advisors or accountants help assess the financial health of the franchise, conduct financial due diligence, and determine an appropriate valuation. They analyze financial statements, cash flow projections, and other financial metrics to ensure accuracy and transparency in the sale process.
• Appraisers: Business appraisers specialize in valuing businesses. They use various valuation methods to determine the fair market value of the franchise, taking into account factors such as revenue, profitability, brand reputation, and market conditions.

It’s prudent to enlist a team of advisors at the following stages of the sales process:

• The valuation stage: If the seller is unsure about how to determine the franchise’s value accurately, engaging a business appraiser or financial advisor can provide valuable insights.
• When preparing for or marketing the sale: Advisors, such as business brokers or marketing professionals, can assist with preparing the franchise for sale, lead generation, and implementing an effective marketing strategy to attract qualified buyers.
• While doing due diligence: Legal advisors can help navigate the due diligence process, ensuring all necessary documents are in order and potential risks are identified and addressed.
• During negotiation and closing: Having legal and financial advisors during the negotiation phase can help protect the seller's interests and ensure that the terms of the sale are fair and favorable.

Visit BizQuest's Business Broker Directory to find a professional to guide you through the process of selling your franchise.