Back to articles page

Selling a Franchise - It’s a team effort
By Tony Arena - #60

When a franchise is being re-sold to an incoming franchisee, everyone must play their part to ensure the right result for all concerned. The Franchisor has a valuable franchise network and is entitled to protect that by only admitting qualified people into the system. The Franchisee could have an asset worth millions of dollars and equally has a right to see that asset sell for its full value. As long as each party respects the other's rights, and work together from the start, the process can be smooth and value will be delivered to all.

Franchisor and franchisee can combine to make the sale of a franchise as painless as possible.

Things Franchisors can do:

1. Create franchises that build strong ongoing income streams.

A typical example of such businesses are mortgage businesses, property management practices or other businesses that can build recurring income streams. One example is a Mr Rental franchise that was bought as a
new franchise for around $150,000 and within three years sold for $1.4M. The buyer felt comfortable that the income would be there for years into the future. You can't beat recurring income.

2. Set up systems for resale.

Most franchisors don't want to know about resales. Their total business model is based on systems, yet when
their star franchisee rings to say they want to sell their business, the franchisor suddenly becomes deaf or wants to change the subject. A franchisor should issue all franchisees with a resale kit that lays out the procedure for the resale and offers tips on boosting business value.

3. Stay out of the transaction.

The franchisor has a right to approve the buyer and that is about all. They should not act as broker for the franchisee as the temptation to act with conflict of interest is much too great. How can a franchisor act impartially
with a prospect when their main thrust is to sell new franchises to prospects. Also the franchisor should resist the temptation to charge high fees on the transaction e.g. percentage of goodwill. The greater the profit that franchisees can make on a resale, the more attractive the franchise will appear to incoming buyers.

4. Innovate and embrace change

A franchisor needs to appreciate that we live in a very dynamic business environment. Manufacturing has been
threatened by low overseas labour costs. Many service companies are under threat from the internet. Online
businesses are proving highly competitive against more traditional models. Franchisors needs to stay ahead of the game and listen to the people at the coalface who are getting market feedback on a daily basis - their franchisees.

5. Be generous in the grant of territories or other rights.

Franchisors who are greedy will soon create their own demise. If franchisees are against the growth of the network, a franchisor risks losing its greatest ally in the sale process - the existing franchisees. New prospects won't come on board if the word is out that the franchisor is cannibalising its own franchisees.

Things Franchisees can do:

1. Understand the policy of the franchisor on resales.

The terms and conditions for resales are written into the Franchise Agreement. A franchisee needs to know what terms apply so there will be no shocks or surprises just before exchange of contracts.

2. Hire a Business Broker that understands franchises.

The last thing that both parties need is for a “successful” sale of a business to a buyer that won't get approved by the franchisor. A well-informed Business Broker will know in advance what criteria the franchisor has for buyers to be approved and won't waste time and the parties' money with unqualified prospects.

3. Ensure that there is a long enough lease on the premises to satisfy the buyer.

Whether the lease on premises is held by the franchisor or franchisee, the duty is on the franchisee to see that there is enough lease left to make a transaction viable. If the lease is under five years, there may not be enough time for the buyer to recoup their investment, and banks may not approve finance over the shorter term. The banks certainly won't extend finance over a period longer than the length of the lease.

4. Prepare the business for sale.

The key to driving business value higher is making the business transferable. The franchisor starts this process by creating systems that anybody can follow. The franchisee must continue this process by doing any or all of the following.

• Making themselves less important in the business.
• Employing senior staff and investing staff with responsibility
• Keeping staff happy
• Maintaining the condition of plant and equipment
• Keeping good financial figures and up to date management accounts
• Maintaining and updating client databases
• Adopting consistent and measurable marketing programs

5. Avoid breaches of the Franchise Agreement.

If the franchisee is in breach of the Agreement, the franchisor is under no obligation to approve the sale. If the breaches are serious and the franchisee is formally breached, the franchisee risks the total asset, as the franchisor may terminate the franchise and the sale will not proceed at all.

Summary

Franchisor and franchisee have individual and legitimate rights to protect and promote in the resale process. Each seeks to build value in their own assets but will not be satisfied unless they cooperate and work together in the process of re-selling the franchise. A successful sale and the introduction of a new franchisee who will
help build the franchise further is the dream result that can be achieved with a little understanding and a lot of common sense.

Tony Arena from www.buyafranchise.com.au

Back to articles page

About Us l International Business l Privacy Policy l Contact us

Copyright © Professional Publishers Pty Ltd. All Rights Reserved.