Preparing to Sell a Franchise Business

Preparing to sell a business involves many steps.  General Exit Strategy topics are covered in other articles on the website.  This post will discuss the specifics of Selling a Franchise Business.  To sell a business requires many steps and events to occur.  With so many points to cover in a business sale transaction, it’s important to note that any one item can unravel a transaction and leave a business seller alone at the altar.  Preparing for the following tips in advance can minimize the potential pitfalls that derail or delay the sale of a business.  These are specific to selling Franchised Businesses.  See the rest of the article below the video.

Franchise Transfer Fee:

• How much is the transfer fee? Who is going to pay for it?  The Buyer, Seller or both
  • Does it include franchisor training for the buyer?  If not, how much is additional franchisor training for the buyer?
  • How long is the remaining term of the transferable franchise agreement?

Even though the franchise transfer fee can be a small amount in comparison to the price of the business, it’s still important to know how much it is and to be clear on the expectation of who responsible to pay it when beginning contact with potential buyers.  For Example, the price on the business could be in the six figures, and the transfer fee could $7,500.  A dispute over an amount as little as $1,000 can derail a sale transaction for a business.   Also, is the buyer expected to pay for additional training from the Franchisor?  If so, find out how much that cost is before finalizing terms with the buyer.  This franchisor training fee can be really small, but if it isn’t disclosed it could derail the sale of the business.  Make sure the buyer is aware of how much time is left on the Franchise Agreement.  This way the buyer is clear on when to renew the Franchise agreement and how much the cost is to renew.

Required Upgrades

• Will there be signage upgrades required?
• Will New FF&E be required?
• Who will pay the cost of any upgrades
  • The cost of required upgrades will affect the selling the franchise business

When selling the franchised business, be aware that if the franchise has updated branding, then be prepared that there will likely be an expense to upgrade the franchise business to the current branding and look.  This can be very expensive, as it mean new signage, new furniture and equipment.  Make sure you get a good estimate of how much this may cost.  This way the amount can be properly factored into the asking price of the Franchise Business.  If the cost of the upgrades are going to be very high, be aware that it could adversely affect the Asking Price of your business.

Franchisor Approval:

• What are the Franchisor requirements for new Franchisees?
  • Two main requirements
    •  Liquid & Total Net Worth
    •  Industry Experience

An important note when it comes to choosing buyers for your business is to make sure they are qualified to meet the Franchisor’s criteria.  There are two main criteria that Franchisor’s look for.  #1 is the Liquid and Total Net Worth of the Buyer.  #2 is the industry experience of the buyer.  Liquid Net Worth is the total amount of Cash On Hand and other easily convertible assets to cash less any liabilities.  Total Net Worth would include illiquid assets, which are those that can not be converted to cash quickly, such as Real Estate Equity.  Make sure your buyer’s numbers meet the Franchisor’s expectations.  Industry experience is also important to Franchisors.  So if your buyer has no experience running a QSR, then your Franchisor may turn them down based on experience.  

Coordinating Closing Timeframe:

• When is discovery day?
• When will franchisee training be completed?
• How long is franchisee training
• All this means that escrow can go on for 60 days or much longer
• Will you offer selling training as well?

A Bulk Sale Escrow for a business can close in just under 30 days if the timing works out and if there are no complications.  It’s a different story when selling a franchised businesses though.  One reason is that the buyer has to be approved by the Franchisor.  This can be a few week process.  Then, when your buyer is approved to buy your franchise business, they have to get franchisor training.  When is that Franchisor training.  Is the next one scheduled for 6 weeks from now?  If so, prepare to wait until that franchisor training is completed until the buyer can take over your franchise business.  Are you going to offer training as well?  Factor all of this in and we could be at a 90 day bulks sale escrow or even longer!  So, it’s important to know the franchisor schedule for Discovery Days, Franchisee Training sessions, and how long the timeframe is to approve the buyer. 

Non Compete Covenant:

• Will you be able to operate other businesses in the same industry?
• Usually not, due to the Franchisor’s intellectual property concerns.

One important thing to keep in mind is that you may be under some restrictions via a Non Compete Covenant on how you operate an independent business in the same industry after you sell your business.  Keep in mind that the Franchisor wants to protect its intellectual property and trade secrets.  So there are usually terms in the Franchise agreement that will govern what you do after the sale of your franchise business.  Read into those terms so you are aware of what you are going to be responsible for.

For More information on how Just Elementary, Inc, Business Brokers can help you with the sale of your Franchise Business contact our Client Care Manager Sonia Chhabra at  (888) 926-9193 or email cs@justelementary.com