There is no point buying a franchise without an exit plan. This is a lesson that both a franchisor and a franchisee need to think about. Some franchisors even make this early training of franchisees so they are more rigorous and aware of what is needed to build a good business ready to sell but often fail to make the same planning for a successful sale from their own franchise system.
Some franchises are hard to sell
A franchise business may still be hard to sell for a wide range of reasons.
- The health of the owner may deteriorate quickly and the business may need to be sold quickly
- the business may be un-profitable
- the franchisor is causing the problem
- the entire franchise system may be under performing or be in an industry that is too competitive or dying a slow death as technology passes it by
- the business may need to be re-located and the franchisee does not have the funds to pay for this
- the lessor may have indicated that the rent is to increase and franchisee wants out before being locked into a new lease term
- the franchisee may be nearing retirement or just tied.
The process of selling will be altered based on why the franchisee wants to sell and how much time there is to sell. This means early planning is essential as otherwise if the franchisee may end up being a desperate seller resulting usually in a lower sale price which is bad for the franchisee and the future sales within the franchise system.
Check the Franchising Code of Conduct
On some occasions it is hard to sell due to lack of co-operation or even sabotage from the franchisor. Code clause 20 sets out that the franchisor can refuse to consent to a purchaser but the franchisee can demand answers in writing and challenge answers but only if well organised. If the franchisor fails to respond within 42 days the Code can require consent for the sale will occur.
Where the franchisee have done all to get a sale but failed, sometimes the franchisor is willing to be a buyer of last resort either to protect the brand, keep the confidence of remaining franchisees or convert to a company store or help complete a private sale. Remember the franchisor may still charge fees even though the franchisee is selling back to the system.
During this process a franchisee should take time to see if it is necessary to use a business broker or lawyer to assist and whether bank’s approval for the release of bank security must be obtained.
Aim to present what a purchaser wants
A purchaser is looking for a clear idea of what the business is about, what the franchisor provides, will the franchisor buyout causing the purchaser to have wasted it’s time, what the new franchise terms will be (often determined by whether the franchisee elects to an assignment or novation under the Code), what the lessor of any premises will accept and full disclosure of the financials of the business. Generally the franchisee will need about 3 to 6 months to secure all this information and work out what to say when the first possible buyer arrives. The franchisee should be sure to practice what to say!
Keep all Options open
Once the franchisee has notified the franchisor, it is best to then ring a few other franchisees. The franchisee needs to know what they might to say to a prospective buyer of the franchisee’s business if that person calls. By good luck the franchisee may find a nearby franchisee wants to be a multi site operator [MSO] and will buy the franchisee’s business. Before the franchisee sells a very successful franchise, the franchisee should consider asking permission from the franchisor to be a MSO or acquire non-competing brands. The franchisor may see the advantage being flexible and allow the franchisee staying as a top performer.
Each franchise systems promotes its brand and to opportunity to recruit franchisees. In turn the website is what a buyer will look at. The franchisee needs to check the franchisor’s website to make sure it presents well. If not, tell the franchisor and FAC and ask that the site be changed as otherwise a sale will be far harder to achieve and the franchisor may in part be responsible.
When planning the sale of a franchise, early preparation is essential as there are a lot of things that can hold up to process. To be sale ready, start by looking at the franchise agreement. There will be a clause that tells the franchisee what the franchisor requires to be told, what rights the franchisor has to buy the business as a first right of refusal and fees the franchisee has to pay. If the franchisee knows that the franchisor is buying back franchises then asking early will often clear the way to be able to sell to the franchisor or move on to sell to a purchaser with the first right of refusal waived to allow a quicker sale. Be sure to carefully ready Code clause 20 as it sets out the rights of the franchisor to refuse to accept your sale.
- Plan ahead well before wanting to sell
- Read the sales clauses in your franchise agreement
- Ask other franchisees what they would say if your purchaser calls
- Know exactly what Cl. 20 of the Code allows
- Get franchisor support before you sell
- Have financials ready to show a buyer
- If a seasonal business, aim to sell at the right time
- Secure the support of key staff the purchaser will need
- Be willing to continue to trade if the sale or franchise terms are not good
Prepared by Alan Branch
President – Global Development
Alan Branch has received multiple awards from the Franchise Council of Australia and is a recognised international consultant and speaker.
This article is for general information and the reader should seek specific expert advice before taking any action.