How to Sell a Franchise Business
Selling a franchise business differs meaningfully from selling a traditional business. Because of the complexity of the process, it is important for a franchise owner to understand the process and best practices for maximizing the value of the sale.
This article provides an overview of best practices for selling a franchise business and outlines some of the most critical considerations such as reviewing existing agreements, working with a broker, attracting potential buyers, and navigating the sales process.
Of course, every franchise business differs. You will need to understand the industry and business model, familiarize yourself with the franchising agreement, and know the options for transferring ownership rights.
Restrictions on Franchise Sales
When selling a franchise business, there are various restrictions that both the franchisor and franchisee need to be aware of, including limitations on:
- Who the franchisee can sell the business to
- How to conduct the sale
- Whether or not the franchisor has a right of first refusal to purchase the company
Additionally, there may be restrictions on the use of the franchisor's trademark, intellectual property, and confidential information. The franchisor may also require that the franchisee pay a transfer fee or obtain the franchisor's approval before any sale can be completed. It is essential for both parties to carefully review the terms of the franchise agreement and any applicable state or federal laws before entering into a sale transaction to ensure that all restrictions are adequately addressed.
As a first step, review the franchise agreement with the franchisor thoroughly. This review process will help you understand the terms and conditions of selling the franchise back to the franchisor, such as the minimum price that must be met or the minimum length of ownership required.
The review will also help you determine if the franchisor offers any benefits or assistance in finding potential buyers, such as having an existing network of buyers seeking franchise opportunities that can be leveraged. This information is vital to consider as it will impact the overall process and outcome of the franchise sale.
Steps Needed to Sell Your Franchise
Set an Asking Price
Assessing the value of a franchise business is a crucial step in selling it. Determining the current worth of the business is key to setting a reasonable sale price.
When selling a franchise business, there are several factors to assess valuation, including:
- Top-line revenue and net profit
- Annual growth
- Level of franchisor support
- Franchise brand value
- State of the franchise industry
Revenue and profitability are telling indicators of a franchise business’s financial health and stability. It can be determined by reviewing detailed financial statements, namely income statements, balance sheets, and statements of cash flow. You should work with a qualified accountant to review these documents to ensure their accuracy.
The level of franchisor support is another important factor in valuing a franchise business. The more support the franchisor provides, the higher the franchise's value. This support can come in many forms, such as marketing assistance, training, and ongoing operational support.
The value of the franchise brand is also a significant factor in the valuation of a franchise business. A well-established and recognized franchise brand with a positive reputation can add substantial value to a franchise business. On the other hand, a franchise business with a tarnished reputation or negative public perception can significantly decrease its value.
Lastly, larger macroeconomic factors, such as the state of the franchise industry, should be considered when valuing a franchise business. Franchises in categories that are growing and expanding have a higher value than those in a stagnant or declining state.
Prepare for Sale
Aside from reviewing the franchise agreement, many franchise owners find it beneficial to work with a broker to prepare for sale. Working with a small business broker can help make the process of selling a franchise business much easier and more efficient. A broker has the expertise and resources to provide a wide range of services, including lead generation, which helps identify potential buyers for the franchise.
The broker can also assist in determining the valuation and a reasonable asking price. And brokers can provide referrals to other professionals that may be helpful during the selling process, namely, attorneys, accountants, and franchise consultants. Finally, the broker can also provide validation services for buyers, ensuring they are credible and able to complete the transaction.
Market and List
Attracting potential buyers is the next step in selling a franchise business. To do so effectively, it’s important to understand the different types of potential buyers and how to reach them. Each buyer type has unique characteristics and motivations, so understanding their personas allows you to customize your marketing tactics.
For example, existing franchisees may be looking to expand their business portfolio, while business owners may be seeking to transition into franchising by purchasing a new franchise. Prospective franchisees may also be searching for a turnkey business opportunity or the opportunity to invest in an established franchise system. Understanding these buyer personas and their motivations can help you tailor your marketing efforts and increase the chances of successfully attracting potential buyers.
Consider the right channels for reaching potential buyers, including traditional advertising, listing the business for sale online, networking events, and referrals from satisfied franchisees. By leveraging a combination of these strategies and targeting your efforts to the specific buyer personas you're looking to attract, you can improve your chances of successfully selling your franchise business.
Negotiate and Close the Deal
Once potential buyers have been identified and contacted, the next step is to navigate the sales process. This involves several key components, including conducting due diligence, negotiating terms, and closing the deal.
Due diligence is an important part of the sales process, as it involves a thorough review of the financials, compliance with regulations, and legal documents related to the business.
While the buyer is responsible for their due diligence, the seller must prepare the documents required to facilitate the process. This may include contracts, leases, and other documents to transfer franchise ownership. As mentioned previously, it's also important to consider the right of first refusal (ROFR) terms with the franchisor and franchise fee terms if applicable, as these can significantly impact the sale.
The negotiation process is another important aspect of the sales process. Being properly prepared to negotiate price can substantially impact the seller's financial outcome. It's critical not only to negotiate the sales price, but to understand financing options, earn-outs, and other negotiable details such as the transfer of intellectual property (IP).
Closing the deal involves completing all necessary documentation, securing financing, and finally, transferring ownership and control of the franchise. Navigating the sales process can be complex, but with proper planning and due diligence, the sale of a franchise business can be successful and profitable for both parties involved.
Get Professional Help
The sale of an existing franchise business is a multifaceted endeavor that requires a sound grasp of the industry trends, understanding the intricacies of franchising agreements, and tailoring marketing to appeal to prospective purchasers. Following best practices helps maximize the value from the sale, minimizes associated risks, and ensures compliance with regulatory requirements. Enlisting a team of experts, whether it be a broker, attorney, accountant, or a combination of all three will help ensure a smooth process when you list your franchise business for sale.