Selling your franchise requires a franchisee to plan well in advance.
What should you, as a franchisee, know about this process?
Selling a Franchise – Are You Prepared?
Franchising allows an inexperienced or less resourceful business to work with a proven, successful brand for mutual benefit. This may sound fairly straightforward, but it usually is so. From choosing a franchise that works for you to making sure that you find a suitable lender to help you raise the capital, franchisees need to look after multiple fronts before they start operating.
This period of intense activity, research and decision-making often leads to mistakes that can prove to be too costly in the long run. Not planning an exit strategy ranks at the top of the list of such mistakes. Buying a franchise is no different to buying any other expensive asset – you need to know if, when and how you can sell it in the future. Much the reason why, all franchisees should be be aware of the process of selling a franchise even before they buy one.
Refer to the Franchise Agreement
Much of the terms regarding the sale of your franchise will be dictated by the Franchise Agreement . Franchisors are never too keen on having to deal with multiple franchisees for the same franchise unit in a short period of time as it somewhat hurts the value of their brand on the franchising circuit.
Most agreements explicitly say how long it will take before the franchisee is allowed to exit the business. From 2-3 years for a low-cost home servicing franchise to 10+ years for a global fast-food brand franchise, this period can vary wildly.
Reasons to Sell a Franchise
You, as a franchisee, can come across multiple scenarios that call the sale of your franchise. It’s important here to note that it is very common for franchisees to sell a profitable franchise and move on to another venture.
The most common reason a franchisee may want to sell their franchise is to take advantage of helpful market conditions. Many franchisees also use the proceeds from selling their franchise to settle the initial franchise finance and invest the profit into a newer franchise that may offer better returns in the long run.
When Should You Sell Your Franchise?
There’s no method that can help you ‘time’ the sale of your franchise to perfection.
As a rule of thumb, you should look to sell a franchise when:
a. You need to raise money for personal reasons,
b. You aren’t able to manage the growing scope of your franchise to the best of your ability,
c. Selling the franchise can be more profitable than running it.
It should also be mentioned here that selling a franchise business is a slow and long process. It may well take 2 to 3 years before you find a suitable buyer and an agreeable price.
What Should You Do Before You Start Looking for a Buyer?
It’s much easier to sell a franchise that can boast of organised operations, well-maintained books, good reputation in the market and, of course, potential to make more money for the buyer. Therefore, before you even begin looking for a buyer, you should survey your franchise operations for any obvious adverse points.
What’s the Right Price?
You may think your franchise is worth a certain price, but the buyers may not necessarily agree. Negotiations are inevitable in any business deal, and franchise resales are no exceptions. To minimise the negative impact of negotiations, it’s advisable to start at a price that isn’t prohibitive for potential buyers.
Most franchises valuate their businesses as a certain multiple of annual earnings. The multiplying factor varies based on the nature of the business, the industry sector, the overall state of the economy and the income potential of the franchise. If your franchise holds significant assets, those can be accounted for over and beyond the earnings-based valuation.
Bringing All the Stakeholders on the Same Page
Selling your franchise also calls for notifying all the stakeholders involved. The franchisor will require you to discuss with them the valuation so that they can safeguard the underlying value of their brand. They will also want to assess the buyer’s profile and credentials to run the franchise before they approve the sale.
Similarly, you will require the lender’s approval for the price point at which you finally decide to realise the sale. Selling your franchise directly impact the profits made by the lender, and hence, it’s also common for lenders to appoint their representative to monitor the negotiations – particularly if the franchise has grown to be very valuable.
Summary – Points to Note When Selling a Franchise
- It may take a long time to find the right buyer.
- To maximise your profits, refrain from selling your franchise in slow, unenthusiastic market conditions.
- Make sure that the franchise is in a ready-to-run state to attract more bids.
- Engage multiple third-party valuators to fairly valuate your franchise.
- Seek help from professional franchise brokers to help ease the process.
- Keep the franchisor and the lender posted about the negotiation developments.
- Use qualified legal counsel to protect your interests.