Fast Franchise Resales
A franchise is a license granted by a franchisor to a franchisee for the purpose of conducting business under the name of the franchisor for a set period of time within a prescribed territory. Franchise resales occur when an operating franchisee decides to sell their franchised business. A franchise operating agreement stipulates the length of the franchised term, royalties and fees payable by the franchisee, and an array of other terms and conditions governing the operation of the franchise. The conditions include terms under which a franchisee may sell their franchised business during the length of the franchise agreement. By immediately notifying the franchisor of the need to sell, a franchisee may be matched by the franchisor with approved buyers in the franchise’s system who are ready and willing to purchase the franchise. At the same time, the franchisee should organize their historical financial records and get ready to list the business with a business broker experienced in franchise resales.
Franchisor Controls Resales
Although a franchisee operates an independent business, the franchisor frequently has veto power over a possible re-sale. The governing franchise operating agreement typically grants the franchisor exclusive power to determine whether a buyer of an existing franchise qualifies as an acceptable franchise owner. The qualification process may hinge on the buyer’s financial records, liquid net worth, and industry experience in which the franchise operates. Because of this control given to the franchisor, it is often best for a franchisee seeking a quick sale to initially ask their franchisor if they know of any other franchise owners (or other prospects) interested in purchasing their franchise. That way, the franchisor will have already qualified and approved of any potential buyer, thus saving valuable time and avoiding a formal approval process.
Present Clear Franchise Terms to Buyers
- Unless a franchisee gets lucky and is able to quickly sell their franchise to another franchisee (with the assistance of the franchisor), they will want to rapidly list their business for sale with a business broker experienced in franchise resales.
- A key component of the sale is clearly presenting the terms of the franchise resale and the ongoing requirements of the franchisor after the sale.
- Terms of the franchise resale includes the scope and cost of the franchisor’s mandatory training period, as well as the cost of the mandatory franchise transfer fee imposed by the franchisor.
- Both the training period/fee and the transfer fee (in the event of a resale) should be contained in the franchise operating agreement and given to every qualified buyer.
- It should also be clarified whether the buyer is expected to pay for such fees or whether the fees are included in the purchase price.
- Moreover, the franchisee should speak directly to the franchisor in order to see if the fees may be waived in whole or in part, and to confirm the current training requirements imposed on purchasers.
- The royalty and advertising fees imposed by the franchisor after the sale should also be clearly explained to potential purchasers so there is no confusion.
- Franchise resales may be accelerated when potential buyers understand exactly what is expected of them when joining the franchise.
- Lastly, potential buyers should be given the Franchise Disclosure Document (FDD).
- The FDD affords all potential new franchisees the opportunity to review critical information about the franchisor and existing franchisees.
Set Reasonable Asking Price
Since the average length of time to sell a business is about 6-12 months, a fast business sale typically requires the asking price to be fair and attractively priced compared to similar businesses on the market. The average valuation for a small business is 2.5 x the annual adjusted owner benefit (or true economic profits adjusted for add-backs), so fast franchise resales should not exceed this valuation level. When selling franchises, the correct level of adjusted owner benefit should be used for valuation purposes. The adjusted owner benefit of franchises must deduct the royalty and advertising fees paid to the franchisor. Otherwise, the buyer (who would need to pay the same royalty and advertising fees) will have a lower adjusted owner benefit compared to the advertised level of adjusted owner benefit that was used for valuation purposes.
Advertise Confidentially with Broker
Although asking the franchisor for help with the sale may help facilitate a fast franchise re-sale, franchise owners should know that the franchisor does not always have an interest in confidentially selling their business for the best possible price. Rather, the franchisor’s interest is in having as many operating franchisees as possible. In contrast, a business broker objectively evaluates the value of a franchised business and then confidentially advertises the business to a wide range of possible buyers from all over the world. Confidential yet aggressive advertising results in a faster sale, a more liquid market, and hence a better purchase price and terms. An experienced business broker maintains the confidentiality of the sale by using ‘blind ads’ (which hides the identity of the business and franchise), qualifying potential buyers, and requiring signed Non-Disclosure Agreements. The qualification process avoids wasting time with unqualified buyers who lack the funds to make a serious offer.
Business owners looking to quickly sell their franchise should first look at any conditions imposed by the franchisor upon a resale as described in the franchise operating agreement. Such conditions may be transfer fees, training fees and requirements, and specific qualifications or skills required of the purchaser. Some franchisors may be able to effectuate a quick sale within the franchised system, but franchise owners should still obtain a fair business evaluation prior to selling. Absent a quick sale with the franchisor, aggressive yet confidential advertising techniques with an experienced business broker is the best way to achieve a fast sale at a fair price.
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.