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 do business under various franchised business models.  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 a business broker with experience in franchise resales and knowledge of its most important aspects. The keys to a successful sale of a franchise is generally anticipating problems, costs, or delays in the franchisor’s approval process of new franchisees as well as pricing the franchised business correctly by emphasizing the benefits of being under the umbrella of the franchise to strategic buyers.

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 and brand, the franchisee is required to pay royalty fees and often advertising 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. The franchisee is given the sole right to conduct business as a franchisee of the franchisor within a specified geographic territory for a specific length of time (often ten year terms). A business that operates as a franchisee may be sold (this is called a franchise resale), but there are unique limitations and issues pertaining to the sale.

Franchisor Must Approve Sale of Franchise

For franchisee owners, the main issue to confront when selling is gaining the franchisor’s approval. In the franchise agreement between the franchisor and the existing franchisee, the franchisor often is given veto power over a potential buyer (and sometimes veto power over terms contained in the actual purchase agreement between the buyer and franchisee). 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

  • Many franchisors interview prospective buyers 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 a 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
  • These requirements may dissuade some prospective purchasers from buying a franchise.
  • But if the buyer is qualified and serious about joining the franchise, then most can overcome such hurdles.
  • Lastly, most franchisors impose a transfer fee upon a franchise resale, which is normally paid by the seller.

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, advertising fees, or royalties that the franchisor requires.

Benefits 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 is obligated to comply with 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 with the franchise.

Buying or selling an existing franchised business has challenges but also many benefits. The proven business model and brand power of many franchises actually results in franchised businesses being more successful compared to non-franchised businesses. 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.