Issues when selling
Some of the critical issues that will be involved in the sale of a franchise business are:
- Finding buyers. There are a number of options available to you when looking for a buyer for your business.
- Business Brokers. A business Broker is a professional who can handle the sale of your business. They usually have a portfolio of other businesses they are selling, as well as potential buyers. They act on your behalf, bringing you and the buyer together and then assist in the process of negotiation, to finalise a deal.
- Customers. A potential buyer is a customer who buys products from you. It may offer that customer a new opportunity in an area he/she is already involved in.
- Competitors. You may find that your business has taken some of the market share away from a competitor. They may be interested in taking over your business, in order to increase their share.
- Employees. Some of the best prospect may be right under your nose. They may be your business partners or staff. If you have been running the business with others, then these people may be likely candidates, interested in taking over. Your managers may be in a position where they would be happy to take over the business because they know how everything runs and are familiar with all areas.
- What is your business worth? Determining how much your business is worth is one of those complex areas that may need the help of an accountant. The accountant will try to establish the value of the business based on its financial records. At the end of the day, the value will be that which is arrived at by negotiation with a potential buyer.
- Arriving at goodwill value. The goodwill value is an intangible thing that is hard to put a value on. The goodwill is tied up with the reputation of the business and the relationship that it has with customers, suppliers and the community in general. It is to do with the image and reputation of the business, which causes people to come and buy there, rather than somewhere else. The fact that the owner has established a customer database, as well as buying patterns and payment history, and has promoted the business – all come into the mix as far as calculating goodwill is concerned.
Prepare the franchise business for sale
Prepare your business before you put it on the market. As soon as the business is on the market there may be intense interest in it and you will have little time to make any other improvements you thought necessary.
Preparing a business is like preparing a car. You have to clean it out, tidy it up and present it in the most attractive way to a potential buyer. In preparing a business, you need to gather together all the information a potential buyer may want and have answers ready for all the questions they will probably ask.
What buyers look at
The first thing a buyer has to be when assessing a business is to review the track record and history of the business and see how it operates? This will necessitate a full investigation of the financial aspects of the business, as well as its suppliers, customers, employees, competitors, marketing, promotional strategies, production, selling methods, etc.
These are some pf the things a buyer needs to look at:
- Financial records. The profitability of the business is what will determine whether a buyer will want to buy or not. Unless the financial records show the business has been running profitably the buyer will not be interested in proceeding.
- Stock. The buyer will want to see the stock figures and will be interested in the method of valuation of that stock. He/she will also look at the age and condition of the stock to determine if any stock is damaged or obsolete.
- Assets. The buyer will want to see a full list of the plant and equipment, as well as the office machinery that belongs to the business. He/she will assess the condition and determine whether the price for each item making up the final price is fair.
- Staff. The buyer will need to check the staff records to determine the background, experience and the skills of each employee. If the employees are going to be retained, the buyer will be very interested in their employment contracts as well as other entitlements. Also union membership and their records as to sickness, etc.
- Customers. The buyer will look at the customers to identify the good customers as well as customers who do not buy very much. He/she will check if there have been any past problems with customers and what issues are involved if a new owner takes over.
- Intellectual property. The buyer will assess the value of the intellectual property, including a full investigation of the patents and trademarks and any copyrights the business owns.
- Debtors and Creditors. The buyer will need to see a list of the debtors (the people who owe the business money). The collection rate and the age of these debtors will be important. Similarly, the buyer will need to look at the creditors to see the bills that are paid on time and whether there are any long outstanding bills and the reason why payment has not been finalised.
- Competitors. The buyer will want to be very clear about the competition in the industry. If there are a number of competitors in the marketplace and they all appear to be operating well, this will give confidence to the buyer that the future business should operate profitably in the future.
- Insurance. The buyer will need to make sure there is sufficient cover in place to protect all the assets of the business. This will include such matters as professional liability and public liability.
- Lease. The buyer will need to look at the lease agreement to make sure the terms of lease are acceptable, the length of the lease and the cost involved will be important and the conditions of getting an extension will also have to be considered.
- Premises. The buyer will look over the premises and make sure they are suitable for the operation.
- Location. The location, of course, is important to any business and the buyer will need to know whether it will need to be relocated at a future for any reason.
- Marketing. The buyer will be looking at marketing methods used by the business to see if they are successful and whether any changes will be required.
- Legal matters. The buyer will need to know if there are any legal issues outstanding, including any unsettled litigation against the company, or any contingent liabilities that are not known.
Why are you selling?
Many franchise owners decide to sell their franchise for a variety of reasons. Even though many franchisees are sold because they are not profitable, most franchises come onto the market running well and running profitably.
The main reasons owners sell their franchises include:
- The franchise is not making enough profit and does not pay the owner enough.
- The franchise has grown to an extent where it is highly profitable, but requires extra capital and expertise from a new owner.
- There are other reasons, such as the owner retiring, a death in the family and other non-family reasons.
Other reasons may be to give the owner a complete change, or maybe the owner wants to seek another involvement, or simply to slow down. It is clear therefore that a franchise is not put on the market simply because it is not profitable.
If you see yourself pressured to sell because of one of the above reasons, but you don’t really want to put your franchise up for sale, look at other options which may allow the franchise to continue while resolving other wishes you may have.
Are you permitted to sell?
It is important to check whether you have approval to sell your franchise. This will depend on the terms of your franchise agreement. Most franchises allow a sale, but this can only be done with the approval of the franchisor. The approval of the franchisor cannot be withheld unreasonably. During the term of the franchise agreement you will find that the agreement usually allows you the option of selling but it is on the following terms.
- The franchisor will probably have first option to buy the franchise from you.
- The new franchisee will need to be approved by the franchisor.
- The new franchisee will have to undertake training to a standard that is acceptable to the franchisor.
- Your franchise agreement may have a condition of payment of a transfer fee.
In general, the franchise agreement will continue without change except it will be under the new franchisee’s name. At the end of the franchise agreement term a new agreement with new terms and conditions may be put together by the franchisor and negotiated with the new franchise owner.
Your right to sell the franchise
The franchisor has full control over the franchise they own. This means that you (as a franchisee) have limited rights and control over the process of selling your franchise. Usually the franchisor has to be given the first right to buy the franchise but if the franchisor chooses not to do this, you will be free to look elsewhere.
It is important for the franchisor to have the right person running the franchise so they will be insisting on approving every aspect of the new franchisee as well as the changes that may be required in the new operation. It is important to the franchisor that the new person has the experience to run the franchise profitability and they must conform to a standard that is acceptable to the franchise group as a whole.
The franchisor’s right to approve the new franchise owner is understandable because they will be concerned that the new owner does not destroy the value built into the franchise over the years. Many franchise agreements will also include a condition that, should a sale take place, a transfer fee is payable by the franchisee to the franchisor. This fee is intended to reimburse the franchisor for any expenses incurred in training the new person.
Dos and don’ts for the franchise sale
Here are a list of the dos and don’ts:
- Do talk to your advisers. Don’t make any moves toward selling until you have talked with your accountant and possibly your lawyer, in case they see things you need to address before putting the franchise on the market.
- Do have good systems and records. It will help the sale of your franchise if your systems and records are clean and accurate. A new owner needs to see that things have been conducted professionally, and that your records show the true position of your franchise.
- Do make sure you take your time. It may take some time for the franchise to sell, so be prepared that it may take some months, or even years, before a qualified buyer is able to take over from you.
- Do make sure all your financials are accurate. Make sure your accountant has completed all the financial results for you, right up to date, because these will be required for the buyer’s accountant
- Do keep everything secret. It’s important that you retain confidentiality when selling the franchise. Especially with staff and customers, because you don’t want to lose staff and you don’t want customer to go elsewhere when they hear the franchise is going to change hands.
- Do keep your key staff informed. You may need to talk to your managers and tell them what’s happening in the franchise. They need to be assured that their jobs are secure. They won’t mind if you are selling the franchise for good reasons especially if their jobs are secure with the new owner.
- Do set up an information memorandum. You will need to put together an information memorandum, which is a profile of the franchise. Your profile will include all the information that a potential buyer needs to have, in order to arrive at a decision.
- Do retain a positive attitude. You need to be upbeat and positive at all times when negotiating with a buyer. If the buyer gets the idea that you are negative about the franchise operation this will feed through and they may lose confidence or interest in your venture.
- Do offer vendor finance. If possible offer vendor finance as this will assist buyers in the short term – they won’t need as much on hand to complete the sale.
- Don’t go for too high a price. Make sure your asking price is fair, based on the profitability of the franchise as well as its assets and goodwill.
- Don’t sell at the wrong time. The best time to sell your franchise is when it is running well and running profitably. You want buyers to inspect your franchise when it is at its best.
- Don’t get unnecessary valuations. In general, a valuation from a professional Valuer is not necessary. This can cost you a lot of money and the figures arrived at may be far away from the real value of your franchise. An appraisal from an experienced business broker will probably be closer to a fair value. Ask your Accountant to come up with a realistic figure as well.
- Don’t forget to be “upfront”. It’s no use hiding aspects of the franchise that you don’t want prospective buyers to see. Being totally honest and pointing out things that need attention will weigh in your favour. It creates trust and confidence. Buyers give you high marks for not hiding things.
- Don’t sign anything before your lawyer sees it. If a business broker or a buyer puts a contract before you, make sure it is referred to your legal adviser before you sign it.
- Don’t forget to get everything confirmed. In your dealings have everything confirmed in writing. Sometimes representations made orally are relied on, and then you may be accused of saying something at a later date that you did not say at all. Try to keep everything in writing so if anything is given orally, confirm in writing later.
- Don’t appear too anxious to sell. Play a little hard to get. Don’t appear too anxious to sell. In this way you should be able to negotiate a higher price than if the buyer sees you want to sell at all costs.
11 reasons for selling a franchise
Anyone interested in your franchise will want to know why you are selling. You should answer this truthfully and be open with the potential buyer.
The most common reasons why people sell their franchise are:
- They want to retire.
- The franchise is not doing well.
- They don’t have the capital to expand.
- There are internal disputes between partners or shareholders.
- There are problems within the family that are affecting the franchise.
- The owner’s interests were starting to drop off and they are looking at doing something else.
- The owner wants to cash in on all the efforts put in to date, so as to utilise the capital for personal or family use.
- The owner wants to raise capital to start a new venture.
- The owner is simply tired doing the same thing and wants a total change.
- There has been a death or illness to a family member or a key member of the staff.
Whatever the reason, be truthful because sooner or later the buyer will find out and if you are not up front this may have repercussions later on. It is important to keep in mind that the buyer must not know that you are desperate to sell. You don’t want to be in a situation where the buyer has the advantage and therefore will negotiate a deal less than desirable for you. Also remember the buyer may not believe what you say, so have supporting evidence or backup data to confirm your reasons.
4 ways to sell your franchise
There are 4 main ways to sell your franchise.
- Sell it by working with the franchisor.
- Sell it by using a business broker.
- Look at selling it yourself.
- Sell only part of the franchise.
- Sell it by Working with the Franchisor.
This method is where your franchisor helps you sell the franchise. Find out what the franchise agreement has to say about the duties and obligations your franchisor might have. The agreement may set out a specific process that must be followed in order to obtain full approval from the franchisor. This is probably the first option because often the franchisor has details of interested parties who have approached him/her looking for a franchise.
If this is the case then it is a simple matter of the franchisor contacting the party and you may have a sale completed quickly. Some franchisors will repurchase the franchise themselves and run it under management so they can pick up the profit. You must talk to your franchisor and check that you have the right to sell your franchise and whether the agreement gives them the right for first refusal.
- Sell it By Using a Business broker.
The second way to sell your franchise is to work through a business broker. You will need to find a business broker who has handled other franchise sales because the process might be a little different from selling a normal franchise. You need to decide whether the business broker should have an exclusive agency or general agency (where more than one business broker is selling) and you will have to agree on such matters as promotion costs and the rate of commission payable on the sale. If you can, find a business broker or a broking firm with a good track record selling franchises.
You may also be able to link up with a business broker who specialises in franchise sales and therefore has a client base of interested buyers who may be keen on looking at what you have to offer. Business brokers also have the advantage in that they may introduce someone who has enquired about other franchises. The business broker will therefore channel their interest towards your franchise and a sale may result.
It is a good idea to work through business brokers because they can qualify the buyers (check them out) and ensure that everything is handled confidentially. This aspect of confidentiality is very important so that problems don’t come from staff, suppliers or competitors.
- Selling the Franchise Yourself.
Another way is to sell it yourself. If this is your choice then it would be a good idea to gain some knowledge of the selling process and the procedures involved. A good aspect is that no one has the passion for your franchise like you and this will show in your negotiations.
You need to arrive at a fair price and your franchisor might help in this area. It may be a good idea to talk with your accountant first as well as your lawyer before you proceed. Understand that selling it yourself will involve a lot more work and this could take you away from your main responsibility of running the franchise profitably. If you succeed, you will save yourself a lot of money in business brokers fees. You may even save yourself dollars in reduced advertising costs.
Unless you have some knowledge of accounting, finance and have confidence in your ability to negotiate with others, then this option is probably one that you should bypass.
- Sell Part of the Franchise.
The final method is to look at selling part of your franchise. This would work if you own two or three different outlets and you may decide to reduce down your involvement by selling one or two outlets and keeping the remaining one. It can also arise in a situation where you have a large territory under your franchise and you decide to sell of part of that territory so your work involvement can be reduced.
You may also have the right under your franchise agreement to sub-franchise part of your franchise or territory so this is an option if you want to either reduce your workload or cash in part of the franchise. The selling options are: either working through the franchisor, seeing a business broker, or selling it yourself
Issues when selling a franchise
Some of the issues that will be involved in the sale
- Finding a buyer.
There are a number of options available to you when looking for a buyer for your franchise.
- Business brokers.
A Business broker is a professional who can handle the sale of your franchise. They usually have a portfolio of other franchises they are selling, as well as potential buyers. They act on your behalf, bringing you and the buyer together and then assist in the process of negotiation, to finalise a deal.
A potential buyer is a customer who buys products from you. It may offer that customer a new opportunity in an area he/she is already involved in.
You may find that your franchises have taken some of the market share away from a competitor. They may be interested in taking over your franchise, in order to increase their share.
Some of the best prospect may be right under your nose. They may be your franchise partners or staff. If you have been running the franchise with others, then these people may be likely candidates, interested in taking over. Your managers may be in a position where they would be happy to take over the franchises because they know how everything runs and are familiar with all areas.
- What is your franchise worth?
Determining how much your franchise is worth is one of those complex areas that may need the help of an accountant. The accountant will try to establish the value of the franchise based on its financial records. At the end of the day, the value will be that which is arrived at by negotiation with a potential buyer.
- Arriving at goodwill value.
The goodwill value is an intangible thing that is hard to put a value on. The goodwill is tied up with the reputation of the franchise and the relationship that it has with customers, suppliers and the community in general. It is to do with the image and reputation of the franchise, which causes people to come and buy there, rather than somewhere else. The fact that the owner has established a customer database, as well as buying patterns and payment history, and has promoted the franchise – all come into the mix as far as calculating goodwill is concerned.
The best time to sell
The best time to sell your franchise is when it is running well and profits are increasing. The signs of success will give a buyer a great incentive to investigate further and hopefully purchase. It is when your franchise is running profitably that the greatest value can be attributed to it. It is important, therefore to watch out for the best time to sell.
If the economy is starting to drop and if these factors affect the potential success of your franchise, then you can either sell immediately at a reduced price or wait until the economy picks up. Remember that in times when interest rates are low, buyers have easy access to funding. If it is difficult to get funding because of the economic conditions, this means fewer buyers will be available and it will create a buyers’ market. The price on your franchise will then have to be low to attract buyers to you.
Try to recognise these fluctuations and pick the most favourable time to put your franchise on the market.
How long does it take?
There are no set times on how long it will take to sell your franchise. Each franchise is different and it will depend on whether there is an interested buyer. Experts say that the national average is anywhere between six to twelve months. However this is based on all types of franchisees and cannot be taken as an accurate guide. It is possible that a buyer may come along, find that your franchise is exactly what they want and complete the deal within a couple of weeks.
Prepare the franchise for sale
Prepare your franchise before you put it on the market. As soon as the franchise is on the market there may be intense interest in it and you will have little time to make any other improvements you thought necessary.
Preparing a franchise is like preparing a car. You have to clean it out, tidy it up and present it in the most attractive way to a potential buyer. In preparing a franchise, you need to gather together all the information a potential buyer may want and have answers ready for all the questions they will probably ask.
In carrying out basic preparation you may come across problems in the franchise needing to be rectified before a potential buyer finds them. There is nothing that will put a buyer off more than coming across problems, even if they are minor. It is the lack of existing problems within a franchise that will give the buyer confidence that the asking price is a fair one. It will also speed up the completion of a sale.
Getting professional help for the sale
You should not sell your franchise until you have discussed it with your accountant and possibly your lawyer. Your accountant will need to complete up to date financial accounts and he/she will also have to put together financial information that needs to be revealed to the potential buyer.
Your accountant can also assist in arriving at a fair value for the franchise. They do this by valuing the franchise based on various accounting methods that are generally used. Your accountant will also need to liaise with the buyer’s accountant on other matters, so the sooner your accountant knows the situation the better preparation there will be.
You may have to talk to your lawyer to sort out any legal issues involved. These could include existing contracts, lease agreements and any franchise agreements, etc. Your accountant can also look at your franchise agreement, contracts on hand, lease of premises agreement, etc, to make sure there are no “fishhooks” that would make it difficult for a buyer to complete a deal.
Therefore, the 3 main parties involved in selling a franchise are your accountant, your lawyer and possibly your Business broker.
Prepare financial information
The financial results will be the main interest for the buyer. The buyer is interested in taking over a franchise that will create a profit. The bottom line for them, is – what profit is the franchise making? Your accountant will have to complete up to date financial statements to show not only the profit of the franchise, but also the assets and liabilities in the balance sheet, as well as the cash flow statements.
Your accountant should make sure that all taxation returns and GST returns are up to date so that there is a clean passing over of the franchise to the new owner. Make sure you have all the answers for questions regarding the financial history of the franchise, as well as the transactions that have gone on before and the current position on, many areas.
What is an Information Memorandum?
An information memorandum is a document that basically sets out what your franchise is all about, who is involved in it, plus the goals you had and whether those goals have been achieved. An information memorandum is a selling memorandum. It helps you sell your franchise by building the interest of the potential buyer. It should give enough information to answer most of the questions potential buyers will have, thus saving you time in providing answers in person.
You should put a lot of time and effort into producing your information memorandum so that the franchise is displayed in the best possible light. This is one of the first and main sources of information for a potential buyer, so it is important that the document is well thought out and well presented.
If you don’t know how to put together an information memorandum ask your accountant or business broker to provide you with confidential memorandums that other franchisees have had, so you can design yours along the same lines. If you have anything that would not favour your franchise in front of potential buyers, it is a good idea to acknowledge them and state some of the solutions you have in place to rectify the situation. You can develop a full information memorandum or an abbreviated one, called a “brief information memorandum”.
The full Information Memorandum
The following is a brief guide on some things you need to put into a full information memorandum:
- Executive summary.
This is a summary of the full contents of the memorandum.
- Your company information.
This tells all about the company and should be interesting enough to catch the buyer’s attention – before they lose interest.
- Your asking price and terms.
You need to give the price early and the terms you are proposing, so the buyers can determine whether it is a cost they can afford and whether they should proceed any further.
- The marketplace.
It’s a good idea to give an overview of the industry, including the potential market. This should also cover the intended market share, as well as the size of the competition.
- Your products and services.
Here you will provide a full description of your products and services, including how you intend to market them and which products have the greater demand and which will be launched first, etc.
You should go into a little detail about your customers, which will give an overview of the type of customers they are, the length of time they have been with you, and rough estimates of what they buy off you, etc. You should also outline whether they are franchisees, individuals or organisations, etc.
Your buyer will want to know who runs the franchise and what employees do. They may decide to retain all staff and management so it’s important that the buyer can see their qualifications, experience and length of service for each person.
- Future plans.
The projected plans of the franchise will be of interest to the new owner who may decide to carry on along those lines. You should have reasons why the franchise is looking at those future plans and clearly lay out what the franchise had hoped to achieve from following that path.
- Financial information.
The buyer will need to see the financial results for the last three years. They will also be interested in your projections for the next three years. This will include profit and loss projections, balance sheets, as well as cash flows.
You may like to put into the appendix supporting material, such as photographs, diagrams, specifications, etc.
The brief Information Memorandum
Once you have completed your full information memorandum, you should complete a summarised form, which should consist of no more than 3 or 4 pages that gives a potential buyer a quick overview of your franchise and your proposal. If they are interested after looking at the brief memorandum they can then be given the full memorandum, which may consist of 20 to 30 pages, fully explaining what you and your franchise are all about.
The brief information memorandum should contain enough information to gain the interest of the buyer and hopefully motivate them to look further into your proposition.
Advertising and promotion for the franchise sale
Unfortunately you will have to outlay money to advertise that your franchise is for sale. The more people who know that your franchise is available for purchase, the more your chance of finding the right buyer at the right price. If you sell your franchise through a franchise business broker they will require a sum of money to pay for the advertising they arrange for you.
Many franchise owners will make a decision to advertise and sell a franchise themselves because if they have to pay the business broker for all the costs involved they may as well look at finalising the deal themselves and save quite a bit of money on commissions. The best place to advertise your franchise sale is in the main newspapers in the “Franchise for Sale” column. It is a good idea to use your logo in your ads and to have the text in such a way that it makes it interesting and attractive to enquire about and yet not oversell.
If a franchise has a good name then you should receive a lot of enquiries. It is probably not a good idea to put a for sale sign in your franchise door, because that will generally give customers the impression that the franchise is not doing very well.
Many franchise owners will also work through immigration consultants who may have overseas people coming into the country and looking for a franchise in order to qualify under the franchise immigration regulations for citizenship or for permanent residency. There are a number of ways that you can use in your advertising and promotion. The trick is to keep this cost down because it can climb considerably and you may have little to show for it.