Franchise Resales: How to Best Handle Them

/in , /by

Like any business, there comes a time when franchise owners may decide to sell their franchise.   The reasons for selling it are no different than any other owner: It could be because of a new venture or change in direction, health, divorce, retirement, or simply wanting to capitalize on the many years of hard work spent building an asset with exit value.

In my many years as a Business Broker and Franchise Consultant, having worked with many hundreds of potential Sellers and Buyers of franchises and businesses, I have often found that selling a franchise has its own complexities, as well as its own inherent advantages for the owners.  Owners should bear in mind that when Buyer Prospects are considering an investment in a franchise resale, they are typically not only evaluating the demand for its products or services, industry trends, complexity of the model, and people requirements, but they also evaluating the reputation and staying power of the Franchisor.  In other words, owners and their representatives need to be prepared to position and leverage any positives the Franchisor can add to the selling proposition.  At the same time, the Franchisor can be very useful in providing valuable insights into the industry, but more importantly, would often have a pretty good idea of what the Seller’s Discretionary Earnings (SDE) multiples look like, based on previous re-sales in the system.  Seller’s Discretionary Earnings (SDE), is the total benefit an owner enjoys, which includes discretionary add-backs plus the owner’s salary.

Owners of franchises often have a bit of an advantage when it is time to sell.  The advantage stems from the fact that a franchise, by nature, is typically monitored and audited by the Franchisor. That fact results in less uncertainty when it comes to revenues and expenses. The overall financial model can also be validated on a high level by reviewing Item 19 of the Franchise Disclosure Document, which outlines financial data for the whole system.  There are also more opportunities for Buyer Prospects to validate the financial model directly by working through a parallel investigation with the Franchisor, and also reaching out to other franchisees in the system.

Another inherent advantage for the franchise owners is that the franchise is part of a network of franchisees who often act as a de-facto marketplace for re-sales when they want to expand and add on to their own operations.  World class Franchisors understand the importance of helping their franchisees exit gracefully and with the highest valuations the market will bear. They understand that the exit event is part of their value proposition, a way to ensure that top quality candidates will continue to be attracted to their model.

Overall, when owners of franchises are preparing and planning for an exit event, they need to consider some of the following questions, very similar to any other business owner, with some variations:

  • Does my franchise have the appropriate level of staffing that allows the new owner to simply replace the current owner? Or does the new owner need to hire additional personnel to maintain the current operational efficiency?
  • If the new owner needs to hire additional personnel, what does that do to the SDE and the business valuation? Can current employee roles be expanded or modified to cover shortcomings?
  • Can I reasonably explain and justify all the add-backs I am claiming?
  • Can my accounting books withstand scrutiny?
  • Especially in the case of a franchise, do I know enough about my Buyer and his/her financial viability so that I am confident that he/she will get approved by the Franchisor?
  • Have I taken into consideration the impact of transfer fees and commissions in my asking price?
  • Have I taken into consideration the timing and sequence for the transaction, and have I budgeted enough time to accommodate the process?

A typical task sequence for a franchise transaction after a Buyer has been located, is shown below:

  1. Offer acceptance (Letter of Intent)
  2. Purchase Agreement signed
  3. Franchisor notified, Buyer introductions
  4. Due Diligence completed
  5. Buyer Franchise Disclosure Document (FDD) review
  6. Buyer investigation/approval process
  7. Escrow process
  8. Transfer Fee paid
  9. New Buyer Franchise Agreement signed
  10. Escrow Closes
  11. New owner training by current owner and Franchisor
  12. Transition period begins