How to Take Charge When Selling a Franchise
Selling a business is difficult, and the process is more complex if you’re selling a franchise.
When you sell a franchise, you must comply with the requirements of your franchise agreement. This added requirement can be frustrating, but the business brokers at Raincatcher can help you through the entire process.
Fortunately, many buyers are interested in franchise opportunities.
4 Benefits of Franchise Ownership
Your franchise is attractive to purchasers for a number of reasons.
1. Brand awareness
Buyers are looking for competitive differentiation and uniqueness in the market.
Franchises with regional or national brand awareness can generate higher sales. If you own a Pizza Hut franchise, for example, you’ll attract customers based on the company name, logo, and the customer’s past experience with the product.
A Pizza Hut franchisee will pay advertising and marketing costs to the franchisor. However, the benefits of national advertising may generate more than enough revenue to cover the franchisee’s costs.
2. Recipe for success
Business owners want predictability, and a successful franchise may offer an operating model that produces consistent financial results. A franchise can offer a track record of sales, positive cash inflows, and net profits.
Customers often become repeat customers at franchises, which allows the business to generate recurring revenue.
3. Formal training
Successful franchises use their operating model to create effective training for franchisees. The franchisee can start business operations with more clarity and fewer questions. Buying a franchise is an excellent example of Buy vs. Build, allowing you as the new owner to start with proven systems instead of starting from scratch.
4. Purchasing power
Pizza Hut franchisees pay lower costs for food ingredients and packaging. The franchise has buying power, which forces vendors to offer lower prices.
An experienced business broker can produce marketing materials to promote your franchise effectively. Brokers use their industry knowledge and extensive networks to find buyers. They understand the buyer’s motivations, and potential obstacles to a sale.
Selling a franchise, however, is more complex than selling an independent business.
6 Challenges of a Franchise Sale
A franchisor may place a number of restrictions on a franchisee’s business sale.
The franchisor wants to identify franchisees who can manage each franchise successfully. Purchasers need financial resources to pay for the franchise, and they must invest the time required to learn the business. If the franchisor produces a high percentage of successful franchisees, the franchisor will earn more royalties.
Franchises that produce a track record of success are also more valued by potential buyers.
Let’s assume that Julie is a McDonald’s franchisee, and she is considering selling her franchise. Here are some common restrictions that Julie may find in her franchise agreement:
1. Approval of the new buyer
Many franchisors, including McDonald’s USA, must approve the transfer of the franchise from the buyer to the seller. Franchisors insist on buyers who have sufficient assets to finance the purchase.
Consider this information regarding a McDonald’s purchase: “The total investment necessary to begin operation of a traditional McDonald’s franchise ranges from $1,518,000 to $2,190,000. This includes an initial franchise fee of $45,000 that must be paid to the franchisor.”
McDonald’s requires that the buyer of an existing restaurant pay a minimum of 25% cash as a down payment, and the balance must be financed for no more than seven years. Each franchise applicant must have at least $500,000 in liquid assets in order to apply.
Your broker can screen buyers to determine if they meet the franchisor’s requirements, and if they can finance the purchase. This step will help you avoid investing time with purchasers who cannot meet the franchisor’s criteria.
Once you identify a qualified buyer, your broker will use metrics and online valuation tools to determine the business price. Brokers analyze the sales of similar companies, industry trends, and market factors to determine the sale price.
2. Experience and training
A franchisor may also evaluate the buyer’s business experience, and the purchaser’s commitment to a training process. McDonald’s franchisees must complete a 12-18 month, part-time training program prior to being allowed to purchase restaurants.
3. Addressing liabilities
The franchisor may prohibit the franchisee from selling a franchise until all franchise-related liabilities are paid. If Julie owes $40,000 to a supplier, for example, the franchise agreement may require her to pay the supplier before the sale.
In some cases, the franchisor can terminate the franchise agreement and take over the franchise, if the franchisee cannot pay its obligations. This part of the agreement protects the franchisor from an operator who mismanages a franchise. The franchisor can take over and find a suitable buyer.
4. Right of first refusal
The franchisor may have the right to buy the franchise, if a third-party purchaser makes a legitimate offer. The right requires the franchisor to use the same terms offered by the third party buyer.
5. Agreement not to compete
Finally, most franchise sellers must comply with some form of a non-compete agreement. The franchise agreement may include an agreement not to compete, or an agreement not to solicit the franchise’s customers.
All of these issues must be addressed in the due diligence process.
6. Assisting With Due Diligence
Due diligence is more complicated when selling a franchise. An experienced broker can help you understand your franchise agreement, and the rules you must follow to comply with the document.
The broker will manage the process of gathering your financial statements, contracts, and other agreements for review. Your broker will create a schedule for document review, so that the due diligence process stays on track.
A broker negotiates final sale price on your behalf, and will ensure that all of the necessary documents are signed at closing. Brokers can also address any laws, regulations, permits, or licenses required for the transaction.
A Trusted Advisor
To sell your franchise, you must deal with the buyer and the requirements of your franchisor. Hire the trusted advisors at Raincatcher, and navigate the complexities of selling your franchise with confidence.
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