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Sell A Franchise

How To Successfully Deal With Your Franchisor

Patrick Jennings

June 04, 2009

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To sell a franchise, you will have to get the cooperation and assistance of your franchisor.

Every franchisor has a set of rules, regulations and requirements when it comes to reselling one of their franchises. I have seen more than a few business owners get quite far along in the process of selling their franchise only to find out the franchisor has restrictions in place that prevent the sale from happening.

When you sell a franchise, you will want to be prepared for these issues - not surprised by them at the last minute.

Item 17 of the UFOC (Uniform Franchise Offering Circular) describes the rights of the franchisor or franchisee to transfer or assign the agreement to a third party, as well as the rights of the franchisor to purchase the business from the franchisee. Some important features in your agreement with the franchisor that may affect your sale are:

The Right Of First Refusal: Many franchisors reserve the right to buy your business by matching any legitimate offer you get from a buyer. Before you put your business on the market, talk to your franchisor to see if they have any interest in buying it. If they tell you they don’t, have them put it in writing. The most sophisticated buyers (your best prospects) will not go very far in the buying process without reassurance that the franchisor is not going to come in at the last second and take the business away from them.

The Right Of Approval: Your franchisor will probably have the right to approve your buyer. The buyer will have to meet the same financial requirements as any other new franchisee. Those requirements may have changed since you signed your agreement, so you should ask your franchisor what financial standards your buyer must meet.

Length Of The Agreement: One of the most important things you must find out from the franchisor is what happens to the remainder of the time left on your existing agreement. If you are two years into your ten-year franchise agreement and the buyer can assume the remaining time on that agreement, that's great. It means the buyer will have eight years left on the current agreement and can assess things accordingly. But if you have only one year left on your current agreement it will create a lot of doubts about the future - the buyer will have to worry about negotiating a new contract with the franchisor the minute they buy your business. If there is just a short time left on your existing agreement see if the franchisor will offer your buyer an early renewal.

Transfer Fees: Usually, the franchisor will charge a transfer fee to cover their legal and accounting costs. It may be a flat fee, a percentage of the current franchise fee or in some cases, a percentage of your selling price. This may turn out to be a big expense for your prospect, so make sure you can calculate it accurately.

Training Costs: To approve the sale, the franchisor will usually require the buyer to go through the same training as all other new franchisees. Again, this may be an expense and time commitment that has changed significantly since you signed your most recent contract.

Re-design Requirements: If the franchisor has introduced a completely new design for their stores since you last signed your agreement, your buyer will likely be required to pay for the renovations of the location.

Seller’s Obligations: You will have at least three demands made of you by the franchisor before you can sell a franchise. First you will have to pay any money owed to the franchisor. You will have to sign a release of all legal claims against the franchisor. And, if there isn’t one already in place, you will have to sign a noncompete clause.

Final Franchisor Approval: The purchase agreement you work out with the buyer will have to be approved by the franchisor. The franchisor will want to see that there are no discrepancies between your purchase agreement and the franchise agreement. Also, they will want to look at the financial terms of the deal so they can verify that the business currently generates enough income to handle the debt the buyer has incurred.

 

Summary : To successfully sell a franchise you should communicate with your franchisor early on in the selling process. It will save you a lot of time and effort and it will prevent you from misleading your prospect. Also, when you know precisely what will be required of you and your buyer up front, you will be able to price the business accordingly.

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