How to sell your franchise
If you’re selling your franchise, there’s a lot to do to prepare your business for the handover. How much control you have over the process will likely depend on why you’re selling, but there are a number of things you can do to ensure everything goes to plan.
Here, we offer a few handy tips for those considering selling their franchise unit.
Why are you selling your franchise?
The answer to this question will have a huge impact on how the sale is carried out, so it’s important to establish this. Is it because you’re struggling to meet the demands of the franchisor? Has the franchise not been as successful as you had hoped? Was it your plan to sell the franchise all along?
Your reasons for selling the franchise will determine how much time you have to organise the sale, whether you can afford to wait for the right buyer and whether you’ll get a good price for your business. Obviously, those who are forced to sell their franchise will be in a less comfortable position than those who aren’t.
Plan your exit strategy
When you first enter into a franchise agreement, you should have some idea of how you're going to eventually exit the business. That's not to say you need to develop a detailed, long-term plan or that you need to have a specific time or date for your exit. Instead, it's about visualising how you will ideally leave the franchise when you're ready to do so.
For instance, do you want to build up a franchise unit and sell it as soon as it will earn you a substantial profit? This type of franchise resale is a common franchisee goal, but it does require a great deal of preparation. Or would you rather build yourself a franchise empire and make a career in franchising? Will you continue expanding until you're ready to retire? Is the objective to work with a franchise until you're financially and emotionally ready to move on to a more profitable franchise or establish your own start-up?
Planning your exit strategy also involves considering what your ideal outcome is. If everything goes as well as you hope it will, how do you see yourself leaving the franchise? Thinking about your exit may seem like a negative way to start a new business relationship, but it’s a vital part of it. It’s a practical and astute way of setting goals and objectives, and should influence the way in which you run your business.
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Tell your franchisor
Some franchisees are nervous about talking with their franchisor about franchise resales. Having built a working relationship with their franchisor over the years, franchisees can worry about whether the franchisor will take the news as a personal slight, seek to punish them financially for selling the franchise or even refuse the sale. However, there's no need to be concerned. The vast majority of franchisees understand that business is business and will have been through the franchise resale process before. They might be disappointed to see you go, particularly if you're selling a franchise that delivers a good royalty fee, but they're likely to facilitate your smooth exit too. After all, it's in their best interest to say goodbye to franchisees who want to get out and bring in new franchisees who are motivated and want to excel. If they don’t, they could damage their sales figures as well as their reputation.
Maximise the value of your business
If you’re looking to convince potential buyers that your unit is a good franchise investment, you’ll need to demonstrate that it’s consistently been performing well over a period of time. If your ultimate aim is to go for a resale, you may want to prioritise strong financial performance over a period of a few years, rather than playing the long game. To do this, you should try to find invest in a franchise with a lower set-up fee, as you’ll want to record higher profit margins. There are other factors that can improve the value of your business too. For instance, low staff turnover, a diverse range of customers and limited exposure to risk can all bump up your franchise’s worth in the eyes of potential investors.
Prepare the relevant material
In order to sell your franchise, you’ll need to provide potential buyers with a number of documents and records. These include your sales and adjusted profit history, three years’ worth of accounts and details of all the equipment you own or lease. You will also need to draw up a brief description of the franchise, provide details of all contractual obligations you have with other entities (such as clients, suppliers, or landlords) and include the price you expect to get for your business.
Have your franchise unit valued
Finally, you'll need to provide details of how you've reached your price. Typically, franchisees rely on professional assistance to accurately value their franchise and lend the findings some credibility. However, you can value the business yourself. You do this by calculating your ‘maintainable earnings’. This is the profit margin franchisees can expect to achieve for the foreseeable future. Typically, an average of the last three years' profit margins is taken. However, this needs to be adjusted to take into account tax liabilities, interest payments and depreciation.
Stay in communication with your franchisor
Communication with the franchisor is essential because they can make the process difficult. Although this isn’t common, troubles may arise if you don’t tell the franchisor until the last moment. It’s particularly helpful to be in close communication when it comes to meeting the strict resale criteria set out in the franchise agreement, because they’ll be able to guide you through the process and highlight any potential issues in good time. They may also be able to help you find a buyer (although they’ll likely charge a fee for this).
It’s likely your franchise agreement will spell out any criteria that you must abide by when it comes to selling on your franchise. Often, the franchisor will reserve the right to review the buyer’s offer and make the same one.
If you do identify a potential buyer, the franchisor will probably want to check their suitability to join the franchise. Remember that not everyone is accepted as a franchisee; their personality and financial capabilities must demonstrate their ability to be a successful franchisee within that particular business. The buyer should also be willing to take part in the business’ training scheme, just as you did when you joined the franchise. Ultimately, the franchisor has the final say on the buyer. At the end of the day, it’s their franchise, and hiring someone ill-suited to the business or to franchising in general could have disastrous consequences.
In order to make this stage easier, you could consider putting together an information pack for prospective franchisees. Include details about your responsibilities and financial targets, as well as what it’s like to work as a franchisee on a day-to-day basis. You could even add information about your premises or the training scheme offered.
Alternatively, try to find a buyer who already knows a bit about the franchise or – even better – works within it. Have you hired anyone who is looking to make the jump from employee to business owner? They could be ideal, as they won’t need as much training, and it’s likely they’ll already fit the franchise’s ethos and requirements. You could also talk to fellow franchisees, as they might be interested in acquiring another franchise outlet. Or they may have an employee who is willing to take it on. There are so many options, so consider looking inside the franchise before you advertise the position externally.
If the franchisor finds a potential buyer on your behalf, they may ask for a commission to reflect the time and effort you’ll have saved. But even if the franchisor doesn’t take it upon themselves to scout out a buyer, they’ll also have to spend time completing any admin that needs doing as a result of your decision to sell your franchise. Therefore, it’s likely you may have to pay them a fee for the trouble it’s caused them. And, of course, you’ll need to make sure you have paid any outstanding fees, such as royalties, management and marketing costs, to cover the period up until the sale takes place.
Selling your franchise can be a long and complex process that requires a great deal of planning. Most franchisees want to exit the business on their own terms, making as much money as they can in the process. This requires you to think ahead and prepare the business for your exit.
Close communication with the franchisor is also required, as they can be both a help and a hindrance. But, if you have the time and foresight to alter your long-term business plan, there are a number of things you can do to maximise the value of your business while achieving a satisfactory outcome for both you and your franchisor.
Alice Tuffery, Point Franchise ©
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