Buying and Selling Franchised Businesses

Franchise Sales in South Florida

Franchises are quite common these days. There are nearly 800,000 franchised businesses in the United States. Everything from pizza places to hotels are offered via franchises.  Because of the excellent climate and demographics, many buyers wish to purchase franchised businesses in the South Florida area. When it comes time to sell or purchase an existing franchised business, only trust the sale to an experienced business broker.

What is A Franchise?

A franchise is a type of license that allows a franchisee to conduct business under the name of a franchisor. In exchange for allowing a franchisee to sell a product or service under its name, the franchisee is typically required to pay royalty fees to the franchisor. A new franchisee will need to pay a ‘franchise fee’ in exchange for a franchise agreement of usually ten years or so. A business that operates as a franchisee may be sold (this is called a franchise resale), but there are limitations and issues that should be addressed.

Franchisor Must Approve Sale of Franchise

For franchisee owners, the main issue to confront when selling their franchised business is gaining the franchisor’s approval. In the franchise agreement between the franchisor and the existing franchisee, the franchisor often is given the power to essentially have veto power over the buyer (and sometimes have veto power over the actual purchase agreement). The franchisor wants to control who is a member of their franchise, and gives itself this authority in their franchise agreements.

Franchisor’s Possible Requirements for Buyers of Franchisee

  • Many franchisors interview prospective buyers in detail in order to see if they will be a solid ‘team member’ of the franchise.
  • Prospective buyers of franchises may need to show that they have the relevant work experience, background, temperament, or financial resources to the franchisor’s satisfaction.
  • Buyer of franchisees may thus have to jump thru some hoops in order to get ‘qualified’.
  • The prospective buyer may have to meet with a member of the franchisor’s team, go through phone interview process, show their financial history, and agree in writing to all of the terms and conditions of the franchise documents.
  • Once approved, the buyer of a franchise will have to usually complete a training process at the franchisor’s place of venue and at the buyer’s expense.

Franchisor’s Qualification Process Too Burdensome?

Obviously, all of these terms may dissuade some prospective purchasers from buying a franchise. But if the buyer is truly committed to buying the business (and becoming part of the franchise), and if they are qualified, then most buyers can overcome the hurdles put in place by the franchisor. All obstacles should be known in advance by the buyer. Further, a professional business broker would typically qualify the buyer anyway as a part of its prequalification checklist.

Buying an Existing Franchise in South Florida 

For buyers of an existing franchised business, the main issue to confront is whether they will want to sacrifice some freedom of running their business in exchange for becoming part of the franchise. In theory, the franchise should offer benefits for becoming part of the franchise, but that is not always the case. An experienced restaurant operator, for example, may not want to purchase a franchised restaurant because they will not want to be told what menu offerings they can serve to their own customers. Of course, they may also object to paying the licensing fees or royalties that the franchisor requires.

Benefits to Buyers of Franchised Businesses

To allay these concerns, a professional business broker should lay out the benefits of being part of the franchise in the listing material presented to a buyer. Some buyers may not be aware that franchised business models are, in the aggregate, far more successful than non-franchised business models. Why? Because franchised business models have an established and proven recipe for success (at least one would hope!).  If the franchise has a recognizable brand name and has strong advertising for the benefit of its franchisees, then that is also a major plus that can not be overlooked.

The Franchise Disclosure Document

Every franchise has built-in legal protections for buyers of franchises. This consists of the FDD (Franchise Disclosure Document) which must, by law, be given to all prospective purchasers of franchised businesses (or purchasers of new franchised territories). As a result, buyers of existing franchisees will receive a treasure trove of due diligence material that is not ordinarily available. Buyers can thus thoroughly look at the financials of the franchisor, review its legal history, and contact other franchisees to learn about their successes or failures.

Sellers and Buyers of Franchises Must Weigh the Cost v Benefits

As one can see, buying or selling an existing franchised business has challenges but also many benefits. When properly presented, sellers will benefit from the peace of mind and the successfully proven business model that being part of a franchise will bring to prospective purchasers. Ultimately, it is up to the buyer to weigh these benefits with the monetary costs and restrictions of being ‘franchised.’

Call Martin today at Five Star Business Brokers to answer more of your questions about buying a franchise or selling your franchised business.