How and When Can You Resell Your Franchise?
Originally posted on 31/08/2017. Updated on 21/03/2019.
When you’re excitedly researching franchise opportunities and considering your future as a successful franchisee, selling the business you haven’t even started yet is probably the last thing on your mind. But businesses need to be sold for a whole host of reasons and this option should be considered from the outset.
Can you buy a franchise then sell it?
Yes, but there are disadvantages and advantages, and the process of selling a franchise differs significantly to the process of selling an independent business.
Primarily, most franchise agreements will outline several limitations regarding the selling of the franchise. You may have to pay a transfer fee to cover the recruitment, vetting and training of the new owner. Ultimately, the franchisor has the final say about who takes over the business. They will want to ensure that the new franchisee meets the same criteria that you did when you first bought the franchise. In addition to this, the franchisor’s control and set criteria could deter entrepreneurs from considering buying the franchise, resulting in a reduced population of buyers.
But there are, of course, advantages to selling a franchise business too. These include the reasons you chose the franchise in the first place. Perhaps you didn’t need any business ownership experience and you got support and training from the franchisor. These characteristics will appeal to others wishing to become a business owner without having to start from scratch.
Franchises are also attractive to buyers because of the clear understanding of the profit that can be made and the costs involved. This is due, in part, to the regular audits that the franchisor will carry out to ensure that the business is performing well. Removing some of the financial uncertainty at the buying stage is a strong selling point, particularly for inexperienced business owners.
The Franchise Agreement
Details of the resale are documented in the franchise agreement which is signed by both the franchisor and the franchisee. The reselling of the franchise is referenced in several sections of the agreement, including:
1. No encumbrance: In basic terms, this means that the franchisee cannot have a mortgage or charge on the business, which affects the franchisor’s ability to transfer ownership to another franchisee.
2. ‘For sale’ restrictions: It may be stated in the franchise agreement that a ‘for sale’ sign cannot be put up at the premises or that the use of the franchisor’s trade name in connection with the sale is prohibited. This means that generic advertising must be used for any sale advertisements; for example, “restaurant business for sale”, rather than “Subway for sale”.
3. Right of first refusal: Typically, franchise agreements give the franchisor the right of first refusal to buy the franchisee’s business on the same terms as a third-party buyer. This provides the franchisor the right to control who purchases the business. After a third-party offer is made, the franchisor has a period of between 30 and 60 days to decide whether they would like to match the prospective buyer’s offer.
4. Franchisor’s consent to transfer: This clause prohibits the franchisee from selling the franchise without written consent from the franchisor. The franchisor should be clear in this clause from the outset, detailing the conditions the franchisee must adhere to for the franchisor to permit the transfer.
The Steps to Take to Sell Your Franchise
When handled correctly, there is no reason why the resale of a franchise business shouldn’t be successful.
First of all, timing is key. Is it the right time to sell your franchise? Consider how well the business is performing and the state of the market before you make your decision. Having reviewed your business, there may be other options that are more suitable for your business at that moment than resale.
Once the decision has been made to sell the franchise, you should get in touch with the franchisor. It is wise to involve them in your plans from the outset. Not only will they be able to offer advice and guidance throughout the process, but they may also have access to a network of prospective buyers. They may even know about particular investors who are waiting for a business opportunity in your territory. It is in the franchisor’s best interests to find the best buyer for the franchise, so involving them should make the process quicker and easier.
It is also important to remember that you may be able to sell the franchise to someone already working in the business, such as a manager or an employee. As part of the process of preparing to sell the franchise, you should try to identify individuals who would meet the criteria of a franchisee. Selling the franchise to an existing employee would not only make the resale process easier for you, but would also be an attractive proposition for the franchisor, as the new buyer would already understand the business, reducing the training and support they require.
Once a new buyer has been found and approved by the franchisor, the business is reviewed by the potential franchisee. This process is referred to as due diligence and involves an examination of the business’ previous financial performance and future profit forecasts. Following this, a sale agreement is produced which lays out the details of the sale. All the parties involved must sign this agreement.
So, it is possible to successfully sell your franchise if the correct steps are taken.
If you have built a loyal customer base, maintained profitability and upheld the premises and assets to a high level, you will have maximised your chances of selling the franchise. However, it is crucial to carefully consider your options when the time comes; look out for a buyer that will increase efficiency for the business and stay in open communication with your franchisor.
Alice Tuffery, Point Franchise ©
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