A Guide to Selling Your Franchise

22/08/2018 17:00 | Start a business

A guide to selling 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?

One of the biggest factors that will determine how you sell your franchise is why you are selling it. Is it because you’re struggling to meet the demands of the franchisee lifestyle? 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’ve got 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 aren't selling because they have to will be in a more comfortable position.

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 thinking how you would 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 does depend on 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 ready, financially and personally, to move on to a more profitable franchise or establish your own start-up?

Planning your exit strategy 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 not. It’s a practical and astute way of setting goals and objectives and should influence the way in which you run your business.

Communicate with the 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 also 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.

Communication with the franchisor is essential because they can make the process difficult. Though this isn’t common, it’s most likely to occur if you don’t tell the franchisor until the last moment. Close communication is also helpful when it comes to meeting the strict resale criteria set out in the franchise agreement. They may also help you find a buyer (though they’ll likely charge a fee for this).

Maximise the value of your business

If you’re looking to convince potential buyers that your unit(s) are a good franchise investment, you’ll need to demonstrate strong financial performance over a sustained period of time. If your ultimate aim is to go for a resale, you may want to prioritise strong financial over a period of a few years, rather than playing the long game. This will probably involve lower levels of reinvestment in the franchise, 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 value.

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 histories, three years’ worth of accounts, and details of all the equipment you own or lease. Franchisees will also need to draw up a brief description of the franchise, provide details of all contractual obligations you have with other entities (e.g. clients, suppliers, or landlords), and then 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 come to value your business. 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.

Conclusion
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 or a hindrance. If you have the time and foresight to alter your long-term business plan, there’s a number of things you can do to maximise the value of your business, too.

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