Franchises take many forms, from restaurants and coffee shops to home repair, auto servicing, bookstores, and fitness companies. Regardless of industry, there comes a time when an owner decides to sell a franchise for various reasons. It may be time to retire after decades of success, or you wish to pursue new opportunities and ventures.
In other cases, unavoidable life circumstances or financial shakeups can drive the decision to sell a franchise. So, how do you go about it? Read this step-by-step guide to show you how to sell a franchise business successfully.
Key Takeaways
- A successful franchise sale requires time, money, and expert advice from your lawyer, accountant, and broker.
- Selling a franchise comprises the pre-closing, closing, and post-closing phases.
- Negotiation and transition are critical to selling a franchise successfully.
How To Sell A Franchise In 6 Steps
Every franchisee needs an exit strategy to ensure a smooth transition. This exit plan is a roadmap to sell your business for a substantial profit. Selling a franchise business follows specific steps and requirements regardless of the industry, as outlined below.
Step 1: Determine Your Asking Price
The first step is to set a price for your business, which begins with a professional appraisal. A commercial real estate appraiser can estimate your business resale value based on your location, income, tax records, and local market trends. Offer your price within a competitive rate because your potential buyers may also hire appraisers as part of due diligence. Ensure your asking price is reasonable enough for a quick sale without compromising profits.
Step 2: Create A Detailed Business Plan and Financial Statement
A business plan and financial details will give your potential buyer all the vital information about your franchise before they buy it. Think of it as a sale prospectus that includes details like your business’s operations, sales and profit history, premises, staff, and equipment. Include your updated accounting records and a realistic asking price as well. Demonstrate to your buyers that your business makes financial sense with documentation to prove it.
Detail Restrictions on Franchise Sales
Every franchise comes with terms and conditions for resale, which your buyers must understand beforehand. Describe the restrictions in your sale prospectus, such as:
- Franchisor’s resale terms
- General lease requirements
- Current franchise contracts and qualifications
- Debt repayments and defaults, if any
- Transfer fees
These restrictions protect all parties from financial and legal problems during the sale process. Your buyer and franchisor must know your business status to avoid entering into an unsustainable agreement. Other restrictions include:
- Right of first refusal (ROFR): A franchisor can buy back your business on the same terms you offer your third-party buyer. This restriction affects buyers who invest resources into due diligence and financing the purchase, only to have the deal terminated at the last minute because of the franchisor’s buying power. Ensure all parties are on the same page when discussing the sale to address the ROFR restriction.
- Post-termination terms: Even after completing the sale, franchisees still have to obey the franchisor’s terms of non-competitive and non-solicitation. This restriction can prevent you from running a competing business for up to three years, so find an alternative way to earn a living after selling your business.
Step 3: Market Your Franchise Business to Potential Buyers
Now that you have a clear idea of your franchise’s value and restrictions, the next step is to put your business up for sale. You can start by listing your business on specialized franchise resale websites or general businesses-for-sale marketplaces. These include Entrepreneur.com, Biz Buy Sell, and Franchise.org.
You can also pay for targeted ads on these sites to appear at the top of search results or banners on the local pages.
In addition, consider other marketing options to sell a franchise, such as:
- Speaking to franchise owners in your area: Fellow business owners in your industry may consider buying your business or link you to potential buyers. If not, they can still help to get the word out and bring leads to your business.
- Speaking to your employees: Remember to consider your team’s ability to purchase your business or connect you to buyers. Many employees would love to run their own company, and this may be the perfect chance for them. Discuss your plan to sell your business with your team unless the resale is strictly confidential.
Step 4: Negotiate with Potential Buyers
Getting interested leads is one thing, but negotiating to sell a franchise is another. Remember that you’ve invested much time, money, and effort into your business, and the decision to sell is challenging enough. Keep an open mind when negotiating your sale price, but draw a limit to what you can accept. Ask yourself the following questions:
- What can you concede?
- What’s the minimum upfront cash you can take?
- What’s the maximum transition period you can offer?
- What non-compete terms can you accept?
Don’t feel offended by offers that come lower than your asking price. Instead, use them as a starting point to pitch your business. Show your buyers that your franchise is worth more than they expect. Use documentary proof and invite them to an open house to meet your employees and see the premises. Each prospective buyer has a unique negotiating approach and expectations, so get ready to meet them halfway.
Step 5: Complete the Sale Process
You’ve found a buyer, negotiated the terms, and now it’s time to close the deal. The sale process consists of three parts: pre-closing, closing meeting, and post-closing.
- Pre-Closing Stage
This is a document-heavy step when you sell a franchise, usually involving your broker, attorney, and accountant. Organize all the paperwork necessary for the transaction, including the following:
- Purchase and sale agreement and bill of sale
- Corporate documents if your business is an LLC
- Tax forms and other government documents
- Leases, titles, and additional proofs of asset ownership
- Financing documents like loans and promissory notes
Ensure your final purchase price includes prorated rent, utilities, final inventory amount, and final accounts receivable and payable figures.
- Closing Meeting
Schedule your closing meeting during office hours, ideally towards the end of a financial quarter, to make the transaction smoother. Prepare to meet with your buyer, attorneys, brokers, escrow agents, third-party financiers, or loan guarantors.
During this meeting, all parties review the documents prepared during pre-closing, fill out forms, and append their signatures. The buyer transfers their payment for your franchise business as agreed during negotiations. You also hand over any confidential documents like intellectual property and IRS forms.
- Post-Closing Stage
Your business now has a new owner, so hand over everything necessary to continue operations during the post-closing phase. These include access codes to the premises, safe combinations, vehicle keys, computer and software passwords, and operating manuals.
Next, dissolve your franchise business entity with your board members or partners, and notify insurance companies and utility providers of the new ownership. Close your IRS employer ID number and business lines of credit, and cancel any permits and licenses associated with your ownership.
Step 6: Transition the Business to The New Owner
With the deal complete, it’s time to introduce the new owner to your former employees and inform your customers, suppliers, and the general public about the sale. You may remain on board for at least 30 days after closing the deal or for whatever transition period agreed upon during negotiations, usually up to three months.
Use this time to set up the new owner for success. Share your knowledge, skills, and experience, and guide them through the nuanced aspects of running a franchise.
It’s essential to acknowledge your employees during the transition period. Encourage the new owner to appreciate the team and offer incentives to retain them under the change in management. Do your best to ensure they keep doing what they love even after you exit the franchise.
Should You Use A Business Broker to Sell A Franchise?
A common issue for franchise owners looking to sell their business is whether to hire a business broker or sell the company themselves. If you’ve been running your business for decades, it can be tough to trust a third party with the transition.
A broker’s commission may dent your expected profits after you sell if you’ve struggled to keep your franchise profitable. Ultimately, you want a quick and smooth transition, so a broker can make the process easier.
A franchise broker serves the following roles when you sell a franchise:
- Market research and due diligence of the franchising industry
- Matching sellers to buyers in a highly competitive market
- Facilitating the franchise sale from finding leads to transitioning to new ownership
- Experience selling single and multiple-unit operations
- Expert advice at every step of the sale process
With a qualified franchise broker by your side, you can manage or avoid the following challenges when you sell a franchise.
Challenges of Selling A Franchise
Let’s look at the most common challenges you may encounter from both the franchisor and franchisee perspectives.
Franchisor Challenges
- Your franchisor must approve the sale, so your potential buyer needs to meet their requirements and yours. A franchise broker can help you screen your leads according to your franchisor’s criteria concerning down payments, liquid assets, and financing period.
- Your franchisor may require your buyer to undergo training before taking over your business. Some training programs last up to 18 months, which may narrow down options if your potential buyers can’t commit to it, even on a part-time basis.
- Your franchisor may insist that you pay for all pending liabilities, such as supplier debts. Otherwise, you risk the franchisor taking over the sale and finding a buyer instead.
Franchisee Challenges
- Due diligence can be long and complex when you want to sell a franchise because of franchise laws and regulations. A franchise broker can take over and manage your financial and legal documents, schedule reviews, and ensure you have everything necessary to close the deal.
- Burnout is a common reason for franchisees to sell their business, even if it’s thriving and profitable. Additional stress can also come from health and family issues that make running your business complex. Potential buyers can pick up on this and withdraw their offers. That’s why a broker can help portray a positive image of your business to your prospects and schedule negotiations when you’re in a better position to handle it.
- Many franchise sellers may use the franchisor’s resale values to estimate their potential, which often leads to inaccuracy. It’s better to hire a franchise broker or appraiser to give you an unbiased, realistic value before listing it for sale.
- Franchisors are rarely excited about franchisee resale plans, which can add stress to the process. Your exit from the franchise may offer your franchisor new growth opportunities, so communicate your plans with them to find the best win-win scenario for your sale.
- While there’s no fixed time frame to sell a franchise business, the process often takes much longer than expected. Instead of underestimating how much time and to focus you’ll need for a successful franchise resale, ask a franchise broker for advice. This way, you’ll manage your expectations and prepare a feasible resale plan based on accurate information.
Six Tips to Sell A Franchise Business Successfully
Despite the challenges above, you can still sell a franchise business without a hitch. Here are some helpful tips to guide you through a successful franchise resale.
- Focus on Lead Generation
Newer franchise listings sell the fastest because potential buyers believe in buying the business before someone else grabs the opportunity. The opposite is also true: buyers perceive an older listing as flawed in some way.
So, when you’re ready to sell a franchise, budget for marketing to capture as many hot leads as possible. Pay for premium advertising online, or hire a franchise broker to find suitable prospects on your behalf.
- Consider A Silent Listing
That said, you can make a silent or quiet listing if you’re not fully prepared to sell your business. This type of listing is similar to an off-market or unlisted property and uses no marketing or ad spend. It gauges the market to see if any buyers are actively looking for what you have to offer. It also makes your franchise seem like a unique or rare find, so buyers would be eager to make the deal.
Only qualified buyers get to know about your listing, meaning you could get more than your asking price and close your deal faster. You’ll need an experienced broker with excellent networking skills to use silent listings as leverage for a reasonable sale price.
- Get A Comprehensive Appraisal
We’ve already mentioned that a business appraisal helps you set your asking price. But it serves a greater purpose for your potential buyers. Most franchise buyers will look for a loan to finance the purchase, so your appraisal helps them to negotiate with lenders. Banks then use the assessment to determine if the borrower’s investment is sound enough before they approve the loan request. Therefore, a detailed and accurate appraisal helps you make a faster sale.
- Maintain Operations
Deciding to sell a franchise doesn’t mean you step away from operations to focus on the sale. A functioning business shows prospective buyers that you’re still making money. It also secures your employees’ jobs and helps them transition to new management.
Understandably, managing your franchise and coordinating its sale can be challenging. That’s why a franchise broker is an invaluable asset. Your broker can handle the franchise sale while you focus on remaining profitable.
- Maintain Good Terms with Your Franchisor
Keep your franchisor informed about your sales process not only because they reserve the right to stop the sale but also because they have lots of valuable information that can help you along. For example, ask for data regarding previous franchise resales, guidelines to follow, and leads for potential buyers. Many franchisors can also advertise your resale on your behalf to make the transition as easy as possible for all parties.
- Budget Wisely
The two main things to plan for when you sell a franchise business are your time and money. First, finding qualified buyers for your franchise may take several months, and the sale requires at least two or three more months to complete. Secondly, you’ll likely work with a team, including your attorney, accountant, and franchise broker.
These translate to financial costs that go into your budget and any additional fees required by your franchisor or government agencies. Plan your finances to accommodate your franchise exit plan. Include a contingency figure to cover you if the process takes longer than you anticipated.
Conclusion
Selling a franchise business is challenging, but it is achievable and worthwhile with the right strategy in place. This guide shows you what to expect and how to manage the sale process for a positive outcome.
Remember that you’ve worked hard to build your business, so when it’s time to transition to new opportunities, make the process as easy as possible for yourself and your employees. Find an experienced franchise broker to help you hand over the baton to a new owner quickly and profitably.