Selling a Franchise Business
If you own a franchised business, what are the challenges to selling it? There are several but this post focuses on one of the fees – the transfer fee – a sale will trigger. Being aware of the fees and other restrictions in your franchise agreement will be immensely helpful when it comes to selling a franchise business.
Before starting Worldwide Business Brokers in 2001, I had roughly 10 years experience starting and running two franchise systems, both consumer-facing retail concepts. When starting Worldwide Business Brokers, I envisioned it as a franchise, like the previous ones. (It eventually morphed into a licensing company, but more on that at another time.) With that franchising background as well as our business brokerage experience with selling franchises, I can speak about the challenges of selling existing franchise units from both the franchisor’s and the franchisee’s standpoint.
In the franchisor’s capacity, we sold new franchises – more technically, we awarded franchise rights to new franchisees. Selling existing franchise units is a different issue and that’s the one we want to focus on in this post.
Franchisors typically award franchise rights to a franchisee for a minimum of five years and many times quite a bit longer. Most sales of existing franchised units happen in more mature franchise systems rather than in very young ones; though occasionally, a new franchisee realizes early on that they are in over their heads and need to be bailed out – usually by the franchisor.
The franchise agreement that is executed by the franchisor and the franchisee contains, among a lot of other detailed requirements, strict and copious rules and restrictions for the transfer of the franchise rights. Specifically, if you own a franchise – whether it be for burgers, healthcare, fitness, hotels or any other franchise system – there are restrictions on how and to whom you can sell your business.
Franchisors are, in many cases, only marginally helpful in the sale of an existing franchise. A big reason for this is that they do not want to cannibalize the sale of new units. Additionally, they don’t want their sales departments to deal with existing units competing in-house with their new unit sales.
Some franchisors will contract with unrelated firms such as Worldwide Business Brokers to sell existing franchise units. This does not eliminate or reduce the resale restrictions in the franchise agreement but only takes the franchisor out of the re-sale business. The existing franchisee that wants to sell and the potential franchisee that wants to buy still need to meet all the requirements outlined in the franchise agreement and the franchisor still needs to approve the sale.
Some franchisors have in-house programs designed to assist their franchisees in selling their existing units. This is particularly true for a mature brand. One reason for this is that most franchisors award territorial franchises; that is, each franchisee, for as long as it meets minimum operating standards (including sales targets, inspection scores, etc.) has the exclusive right to operate that franchise in a specific territory (subject to the other terms of its franchise agreement). If the franchisor has another qualified candidate for that specific territory, the franchisor is likely to assist its existing franchisee in selling its franchise rights.
When you want to sell your franchised business, read the franchise agreement’s transfers section carefully. You are likely to find that any buyer will have to be approved by the franchisor, will have to have minimum financial capabilities and essentially will have to meet at least the same standards and levels for business and financial expertise that you did when you were originally awarded the franchise.
The buyer and its managers will have to meet the same educational requirements, meet the same financial and net worth qualifications, attend the same training classes, go through the same franchisor vetting process, sign a new, current and possibly more onerous franchise agreement and essentially meet all the franchisor’s standards that you did; and maybe more, if those standards have changed which, if your franchise is more than a couple of years old, is probably the case.
All of this means that you would be wise to vet your potential buyers early on – before you even disclose any financial information – by finding out what your franchisor’s requirements are; or enlist the assistance of a business broker with experience in the sale of franchises. Such experienced brokers know the ropes, understand the FDD (Franchise Disclosure Document) and work with legal counsel that specializes in franchise law, all to your benefit.
A big point of contention that we see when a franchisee wants to sell its franchise is the franchisor’s transfer fee. A transfer fee is the fee a franchisor charges to the franchisee if the franchisee sells the business or shares in the company operating the franchise. The level of the fee and the restrictions on the franchisee’s rights to sell the business or shares will be set out in depth in the FDD. As far as I know, all franchisors require a transfer fee to be paid to the franchisor when a franchise is transferred from one individual or entity to another.
This fee is meant to offset the franchisor’s internal administrative costs of the transfer and can be many thousands of dollars. Who pays – the seller or the buyer – is a point to be negotiated, but as the seller, you need to be fully aware of what the transfer fee is and prepare for the selling process with it fully in mind. Of course, knowing what the other fees a buyer will be obliged to pay will be and considering them in the context of a sale, is equally important. This is particularly pertinent when establishing a price for your business.
The transfer fee is one of several fees that may be triggered by the re-sale of a franchise. These fees are meant to cover the costs that the franchisor will incur assessing whether or not to exercise any first option it may have to purchase the franchisee’s business or shares, evaluating proposed buyers (if the franchisor chooses not to exercise its option to buy the unit) and to provide training to the buyer. If the franchisor has introduced the buyer to the franchisee, it may also charge a finder’s fee.
If your business is a franchise and you’re considering selling it, what are your biggest concerns? We’ve got a lot of franchise experience here and we’d love to help out. Let me know in the Comments box. If you leave your email, I’ll respond directly. If you don’t, perhaps a blog post or podcast will be a good place to answer it. So, let me know! If you’d prefer to reach me directly, you can do so at joe@WorldwideBusinessBlog.com.
Another good source of information is a good franchise attorney – and I interviewed one for a recent podcast. Jim Wilson, the founding partner of Wilson Law Group, is a small business and franchise specialist that we have worked with for many years. My interview with him touches on many aspects of selling a franchise business and his contact information is in the show notes on the podcast page. Give him a call.
If you have any questions, comments or feedback, I want to hear from you. Put them in the Comments box. 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!