Many business owners consider selling their business at some stage for a variety of reasons. Before starting the process of selling – in particular, the selling of a franchise – a number of things must be considered.
Selling a franchise involves more parties than just the seller and the prospective buyer. This necessitates that you must properly plan the sale, to ensure that it happens as smoothly as possible.
Prepare for the sale
Once you have decided to sell, a number of things should be done early on to ensure that selling the business yields the best results for everybody. Get the assistance of professionals to look at the business from a financial and a non-financial viewpoint to provide a proper review of the business.
This will help to identify possible issues which can be addressed in time in order to improve the saleability of the franchise. An action plan that prioritises the issues that should be addressed first must be formulated and implemented.
Compile an information pack for prospective buyers. The pack will assist them to make an informed decision on the feasibility of buying the business at the asking price. This info will also assist the franchisor in determining the fairness of the asking price when having to approve the sale of the business.
Franchise agreement
The franchise agreement forms the basis of the agreement between the franchisor and the franchisee and regulates their relationship. As standard practice, it also contains a section dealing with the sale of the franchise. This stipulates that the franchisor must approve the sale of the business and the prospective franchisee.
In some instances, it also gives the franchisor the right of first refusal. The franchisor won’t be allowed to unduly withhold the permission for the sale. It’s a good idea to study the franchise agreement and engage the franchisor during the planning of your exit strategy, though.
This will help you to better understand their views on who they would like to take over your franchise. Look at restriction clauses that might limit your participation in the same industry.
Franchisor’s role
It is standard procedure that the franchisor has the final say on the suitability of the buyer to become a franchisee. You can find or identify a prospective buyer on your own, but many franchisors have a list of interested buyers and the areas they are interested in.
It might save time if the interested buyers have been pre-screened by the franchisor and will be approved by the franchisor as a buyer. Keep in mind that the franchisor can, however, charge a fee if they find the buyer.
Potential buyers
It is a good strategic option to identify someone in the business that you can potentially sell the franchise to. The selling process can be expedited if someone who has intimate knowledge of the franchise decides to take over the business.
This will also be reassuring to the franchisor when it comes to the future operation of the business. You should try to make identifying a possible internal buyer part of your exit planning, from an early stage.
If your business is well-run, you should be able to attract potential buyers. Any buyer will be attracted to a business with a good client base, meticulous record keeping and year-on-year profits being achieved along with well-maintained assets, premises and capable employees.
After a potential buyer expresses interest in buying and the initial terms of the sale have been agreed on, the buyer will check out the business information that was provided. This process of due diligence allows them to make sure that the information is all true. This includes material like employee contracts, contracts with suppliers and any financial aspects that influence the value of the business.
After the buyer is satisfied, a final sales agreement can be drawn up. The agreement should contain everything agreed on between the parties, ensuring that there are no unresolved matters.
An important clause that usually needs to be included is that the buyer must complete the franchisee training before the franchisor will agree to the finalisation of the deal.
Jo Thornley is head of brand and partnerships at Dynamis.
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