Franchise businesses are actually the most common businesses that are out there. People start a franchise business because they get to use the name, business model, logo, and reputation of another company that’s already proven to be successful. That way, they don’t have to take the risk of starting a totally new business that no one has ever heard of before.
Some of the biggest franchises that are out there include McDonald’s, KFC, Burger King, Subway, 7 Eleven, Pizza Hut and the list just goes on. Many of the restaurants, gas stations, and fitness clubs that you see are likely franchise businesses which each have separate owners. Of course, they must pay royalties to the corporate office which owns the rights to the business. The corporate office is the headquarters of the company where the owners, or franchisors, manage the overall business and all the franchisees they’ve given licenses to.
When someone starts a franchise, the owners of the company must approve the person first, even if they have the money. If approved, the person can then start the franchise business and run it. However, they are under certain limitations and restrictions in regards to how they run their business. These same restrictions apply to when they want to sell their franchise business as well.
Rules and Restrictions
The important thing to understand about franchise businesses is that they all must abide by the rules and standards set forth by the franchisors. The reason these rules exist is because the corporate office wants to maintain their company image and they don’t want a franchisee to tarnish that with a business model that is different than their own. Franchisors are always involved in every big decision that a franchise business makes, including the sale of the business. Since franchisors must approve when someone starts a franchise business, they also have to approve the buyer who is purchasing the franchise business from the seller. Like with the original owner of the franchise, the franchisors want to make sure the new buyer is capable of running their proprietary business model and implementing their methodologies into it the same way the seller did before.
All franchisors have their own unique set of qualifications which must be met by any new franchisee. Before the sale of a franchise business, the buyer must sign a franchise agreement created by the franchisor. This is the same agreement that the seller had to sign when they first started the franchise business. In addition, the current franchisee (seller) must settle all debts and payment defaults related to their franchise business before they can transfer it over to the buyer. This is usually a requirement set forth in the franchise agreement. When the debts are settled and the transfer is ready to be made, the franchisee will execute a general release of their rights to the business which waives any possible lawsuits that may be made against the franchisor. As for the financial terms of the sale, the franchisor is the one who gets final approval over them. This means doing a credit check and background check on the buyer in order to ensure they are financially responsible enough to pay their bills and not default on any loans they use to purchase the business. And, of course, a transfer fee must be paid to the franchisor at the time of the sale.
The main benefit of selling a franchise business is that you’ll likely have a lot of interested buyers already available to choose from. Since franchises are usually attached to companies with great reputations, buyers are always eager to purchase them because they figure it will be easy to make them successful and profitable businesses. Often times, franchise businesses are in central locations that have a lot of people passing by them which only makes it look more attraction to the buyers.
There are two main reasons why a seller would want to sell their franchise business. Either the business is very valuable and they want to cash out or they simply aren’t running the business well and they want to get out before they lose everything. Since there’s a steady flow of buyers who want to purchase franchise businesses, it makes either scenario possible for the seller. Usually, a seller will sell their franchise business just to make a profit and move on to another business.
There is only so much that a franchisee can do with a franchise business in order to make it successful. It’s not like they can branch out and open multiple locations of their business because they don’t own the rights to the company. They could always open additional franchises but they’d still have to abide by the rules of the franchisors in the corporate office. This puts a lot of limitations on franchisees who want to expand their businesses to greater heights. So, what a lot of franchisees do is build up their franchise business to the most profitable and successful that it can be and then they sell their franchise business to another buyer. Then, the franchisees move on to another franchise business and try to make that successful so they can do the same thing there. It really works out great for all parties involved.
Tips for the Sale
- Studies have shown that franchise owners tend to get higher prices for their franchise businesses when they sell them early on. Newer listings will motivate potential buyers into grabbing a hold of that franchise business first before anyone else does. However, listings that stay on the market for a long time will turn off buyers because they’ll think it is not a good business if it hasn’t already gotten bought by now. That is why a franchise owner needs to do everything they can to sell their franchise as quickly as possible, even if it means hiring a Business Broker to help them sell it.
- Before you go ahead and hire a broker to list your franchise for sale, get an appraisal on the value of your business first. That way, you’ll know the right selling price to ask for. This is not only important for the franchise owner to make the most money possible, but it also helps the buyer when they’re dealing with their bank to get a loan. The bank is going to want to look at an appraisal of the business so they know their loan money is going toward something of equal value. Without an appraisal, buyers will have a much harder time getting a loan to purchase the franchise. Related: How Seller Financing Works
- Another very important thing to remember is to not neglect the operation of your business. Even though it is for sale on the market, that doesn’t mean you can just forget about it and only focus on the sale. Otherwise, you will be hurting your business which could end up jeopardizing the possibility of you getting a sale. Therefore, you want to make sure that you have a valuable business to sell by always keeping it operational. If you don’t have time to run the business and manage the selling of the business, then that is one more reason to hire broker so they can sell it for you. Brokers have a lot of connections when it comes to advertising and it will definitely be worth the broker fees to have them do this for you.
- Of course, you should keep the franchisor in the loop about what is going on with your sale. You’ll want to stay on good terms with them too because they are the ones who can stop the sale of your franchise business if they wanted to. On the other hand, the franchisors can assist you in selling the franchise as well. They can give you tips on how to sell your business and remind you of the franchise guidelines that need to be met. Some franchisors will go so far as to give you free advertising in the sale of your business.
- Now you may not necessarily be in a hurry to sell your franchise business if it is successful and you’re making plenty of money from it. Rather than putting it on the market for a long time, you should consider creating a silent listing for the sale. This is the type of sales listing that won’t actively be advertised in the marketplace. Instead, only qualified buyers will be informed about the listing through either the franchisee or their broker. The great thing about silent listings is that it gives franchisees the opportunity to ask for a bigger price than they could get on the market. On top of that, they don’t have to risk having a listing on the market for a long time and turning off buyers because of it. Silent listings look like special opportunities to the few buyers who have the privilege of learning about them. This makes buyers want to jump at the chance to make a deal.
- Once an agreement on the price has been made between you and the buyer, do not expect the sale to happen right away. Most sales involving franchise businesses can take anywhere from 2 to 3 months to be completed. This is good because you’ll want to use this time to prepare your budget for leaving the business. Don’t forget that you’ll have to pay for an attorney to handle your sales contracts and agreements, an accountant to advise you on taxes, a franchise broker to handle the sale, and other exit fees associated with your departure from the business.
Video (by Promethius LLC): Selling a franchise is tricky and can take a long time to complete. There typically are no systems in place to make it an easy process.
After the sale of a franchise business, the franchisee will still have some obligations left after the transfer of the business has been made. A lot of these obligations must do with what businesses or jobs they can and cannot take after the completion of the sale. Most franchise agreements have non-solicitation provisions and non-competition agreements which outline that franchisees cannot start a competing business for the next 2-3 years after they sell their franchise business. Also, franchisees cannot use any customer lists or anything related to their previous franchise business which could help them in any new business they create from scratch. The franchise agreement has more specific information about these terms but this is the general idea of what franchisees can expect after a sale.
Selling Your Business: Going FSBO vs Hiring a Broker
It is important for franchisees to understand the post-sale terms because if they are planning to start another business, these terms can have a negative impact on what they’re allowed to do. Many franchisors in the corporate office are not very keen on negotiating these terms either. After all, business is business and franchisors certainly don’t want a franchisee to run away with their customers and create more competition for their company. That is why a lot of franchisees typically retire or start an entirely new business in a different industry after they sell their franchise business.
In some scenarios, the franchise agreement may force the franchisee to train the buyer on how to run the business after the sale is made. This makes the franchisors feel better about the transition of the franchise to someone new. They want to make sure the new franchise owner is comfortable with the operation of the business and not overwhelmed with all the responsibilities that have been given to them. It is almost like the experience of starting a new job for the first time. Everyone gets nervous at a new job during the first couple of weeks but then after that, things start to get easier. This is basically how buyers feel when they take over a franchise business. They need the previous owner to guide them in how they ran the business successfully so they can do the same and then eventually build on that success. Again, franchisees only have to do this if it’s required in the franchise agreement.
More on the topic:
- How Long Does it Take to Sell a Business
- How to Sell a Business Fast
- Legal Steps to Selling a Business