An established franchise business can be a great business to buy. As opposed to starting a new business, they offer a number of benefits to the owner. Some of these are immediate favorable name recognition for the brand, a system for operating a business, and training and support. When selling the business, there are some potential roadblocks that the buyer and seller should be aware of in order to avoid them and have a smoother sale.
There are two important documents to review, preferably before marketing the business. The first is the franchise agreement that the seller signed. This will show when the agreement expires, what the franchise fees are, and what the transfer fees are when selling the franchise. All of these terms may be different than the current terms for a new franchisee. If so, when the business is sold, what terms will the buyer be getting?
The other document that should be reviewed is the Franchise Disclosure Document, or FDD. This is a document required by law and gives a lot of information about the franchise. There are states that require franchises to register and make the FDD’s available online. The Federal Trade Commission publishes a Consumer’s Guide to Buying a Franchise, https://www.ftc.gov/tips-advice/business-center/guidance/consumers-guide-buying-franchise which is a must read for a buyer. It gives a lot of good information about what to look into when you buy a franchise and an explanation of the parts of the FDD.
Here are some of the issues that can create roadblocks when selling a franchise business:
- An Unqualified Buyer. In the sale of a franchise business, the franchisor must approve the buyer and the buyer must complete training – usually a week or two at the franchisor’s location. The FDD, and the franchisor, should be consulted for what qualifications are required of a buyer. Common ones are the buyer’s net worth, cash to invest, business background, and credit score. Another one may be his command of the English language or education. It’s important to know what the qualifications are up-front so you don’t waste time with an unqualified buyer.
- Buyers do not, typically, pay cash for a business. The most common ways business sales are financed are with seller loans or an SBA loan. Not every franchise qualifies for SBA financing. Check https://franchiseregistry.com/ to see if the franchise qualifies for SBA financing. If it does, it will state “SBA: Yes” There can also be other requirements for financing. For example, one franchisor requires that a buyer finance no more than 50% of the selling price.
- Transfer Fees. Transfer fees vary substantially, typically from a few thousand dollars to tens of thousands of dollars. Some are 10% of the sale price. The seller should decide up-front on who is going to pay what and market the business with that information.
- Using the Franchisor to Sell the Business. There is a conflict of interest when the franchisor is hired to sell the business. The franchisor wants to increase revenues which will increase their franchise fees. The sale of an existing, successful, franchise will not do that. They will see it as “trading dollars”. We’ve seen franchisors steer potential buyers to buying a poor performing franchise or a new location instead of buying the seller’s business.
- Unqualified Advisors. There are issues involved in selling a franchise business that an inexperienced business broker or attorney may not look for. As in anything in life, it’s worth it to work with qualified advisors.
As with any business sale, there can be issues that hold up a sale. These are some of the more common ones that come up in the sale of a franchise business. Avoid them and the sale of your franchise business will go much faster and smoother.