Selling a Franchise Business: The Challenges
Selling a business is challenging enough. Selling a franchise business has its own challenges – and if you want to include selling franchised businesses in your business brokers practice, you need to know what some of those distinct challenges are.
Selling a franchise business is, in one important aspect, similar to selling a non-franchised business – and the job includes many of the same challenges. Like most business owners, franchisees are not experienced in selling their business, and have no idea what’s involved or how long the process will take.
In most cases, the franchise is the first business the franchisee has owned. They’ve never bought or sold a business before. (Buying a franchise is a very different experience compared to buying an independent business.)
When a franchisee decides to sell their business, they rarely have any understanding of the complexity of the process, the length of time it will take to find a buyer and, more importantly, the role of the franchisor in approving a buyer. And, like far too many sellers, they generally have an inflated opinion of the value of their business.
The Added Ingredient
Selling any business is a complex and time-consuming process.
I’ve written before about how this process unfolds, the likelihood of success, the necessity of a professional valuation, the talent that a seller should assemble, the emotional aspects and many other issues to consider when preparing for a sale.
Selling a franchise business involves all of these considerations, as well. But selling a franchise business includes one significant additional facet, and it’s a big one: The franchisor.
Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to market and sell businesses.
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Franchisors want to expand their network and to do so are generally focused on recruiting franchisees for new outlets or to open up new territories. Reselling existing units or territories is not what they’re set up to do and they rarely have the resources to support the resale of existing franchises.
More importantly, franchisors are not keen on offering their existing units for resale if for no other reason than that it can negatively impact their efforts to recruit franchisees for new outlets or territories.
Many franchisors – especially small and mid-size brands – would rather outsource the job of selling existing units. Over the years we’ve had agreements with more than 50 franchisors to handle the sale of their existing franchised units.
Who’s the Boss?
In the sale of most existing franchises, the main player is the franchisor. Both the seller and the business broker need to be aware of this fact and understand the requirements governing the transfer of franchise rights contained in the original franchise agreement signed by the seller, the franchisee.
Almost all franchise agreements will require the franchisee to inform the franchisor in writing of their desire to sell. Many franchise agreements give the franchisor the first right to buy the franchise back. That is, the franchisee may be require to sell to the franchisor. This requirement, in and of itself, adds a challenge to the process because such a requirement will often have the effect of dissuading a buyer from making a legitimate offer simply because they know that, if the franchisor can come in a buy, the time a potential buyer would spend analyzing the opportunity could be wasted.
But, again, the primary interest of most franchisors is to expand their network. They’d prefer that someone else – the selling franchisee or a third party such as a business broker handle the marketing sale. But in that case, the seller and the broker must be aware that the franchisor is the ultimate decision-maker in the deal. And, if the franchisor has the first right to buy, hiring a business broker to handle the sale does nothing to eliminate the likelihood of a buyer concerned about wasting its time.
Know Ground Rules
Before starting the process of selling an existing franchise, the franchisee and the business broker must be cognizant of the fact that any potential buyer must meet the franchisor’s current selection criteria – capital requirements, business background, personal integrity, etc. – in the same manner that the franchisee him- or herself had to do before being awarded the franchise rights in the first place.
Each franchise agreement has a section governing how any transfer – including a partial transfer of ownership – can take place.
Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to become a professional business broker.
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The Bottom Line
Selling a franchise business usually involves an participant – the franchisor – that the sale of a non-franchised business does not and in the sale of an existing franchise unit or territory, the franchisor is the proverbial elephant in the room.
Each franchise agreement has a section governing how any transfer – including a partial transfer of ownership – can take place. Read it closely and understand its requirements. It is extremely important that the seller and the business broker are aware of the restrictions and processes required by the franchisor before embarking on the process of selling any existing franchise unit.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!