November 8, 2016
Bottom line, there is no better exit strategy from owning a franchise unit than selling it. Only this option gives you the ability to retain the equity you built into the unit as well as cash out on your initial investment.
For the smart franchisee, this is your long-term goal.
I understand it’s an odd thing to consider entering into the process. When you first sign that mountain of paperwork necessary to open your franchise unit, the endless optimism and adrenaline fools you into believing that you will enjoy this role for eternity. Regardless of how much you enjoy running the business, someday you will look to move on or grow weary of the day to day. From retirement to navigating health concerns, business franchisees will at some point need to step away from the business.
Unfortunately, what many franchisees don’t realize is that the ability to sell your unit is largely defined by the actions you take setting up your business. You need to ensure that your FDD covers three different possible exit scenarios, including transferring (or selling), death, and termination. If you’re in the early stages, check out the best strategy for approaching each of these situations in the FDD.
For those franchisees that are on the other side, looking to move on from their franchisee unit, here are several things to know about the exiting process when you sell.
Each franchise builds in specific terms for selling or terminating a franchise agreement. Ideally, you would have reviewed these prior to signing to ensure you had the ability to sell later on. Assuming you did, it’s still important to review the specifics with a lawyer to avoid any missteps throughout the process and garner franchisor approval when necessary.
You also need to account for any transfer fee contained in the franchise agreement when selling your franchise. Many franchisors institute a flat transfer fee of $5,000-$10,000, although it’s not uncommon to see the FDD state that the transfer fee will be a percentage of the then current franchise fee. Buyers and sellers work out the specifics of who pays the transfer fee in the letter of intent. Many times they will split the fee or each cover a percentage.
The same level of scrutiny you invest into the FDD needs to be done for a brick and mortar lease. A prospective buyer will not look fondly at having to move their operations. In many ways, that constitutes starting over, completely undermining the benefits of purchasing an operating franchise. Check out my list of must-have components of your real estate lease here.
Know you don’t have to go this process alone. Many times a franchisee can work with a business broker or even the franchisor to find a suitable buyer.
While approaching the franchisor might seem an odd route, it’s not uncommon for franchisors to have buyers inquiring about purchasing an existing unit. Many prospective franchisees prefer to purchase an operating business. It takes out the guesswork of starting on their own and creates less risk on their investment.
Working with a broker will help reach a range of qualified prospects as well. It’s also worth checking to see if your franchise has already established a relationship with brokers in your region. These brokers will be adept at screening candidates, putting more qualified and serious candidates forward based on the specific needs of your franchise model.
While I would recommend bringing in a lawyer to help review your selling options with the FDD and transferring your lease, the most essential place to bring in a lawyer is prior to establishing the letter of intent (LOI). This document, a staple in all major business transactions, outlines the specific terms of your agreement with the buyer. The initial LOI will start a round of negotiations as both buyer and seller finalize their terms.
In order to limit my client’s liability, I recommend that buyers and sellers agree to an asset purchase agreement. Other options leave the buyer open to liability, either from pending or potential litigation. These details are all spelled out in the LOI.
Once signed, these are the terms you agree to. Bringing a lawyer in afterward to review it will be the equivalent of Monday morning quarterbacking. They can showcase areas that you left yourself open to liability or agreed to poor terms, but there is nothing you can do about it.
Establishing the LOI is a substantial piece but not the close of the transaction. There are several large hurdles to go forward. A good lawyer will work with you throughout the final stages to see the sale to completion.
Business sales rank highly as one of the more complex transactions. In short, there are multiple moving pieces throughout the transaction. From reviewing the books to garnering approval from the franchisor to working out the details with the landlord to securing financing, you’ll discover several hurdles after putting the LOI in place. Each measure has the potential to blow up the deal if not handled in the right fashion.
For example, many deals will be contingent on the buyer getting financing or the seller getting approval from their landlord and the franchisor. When a buyer only gets partial financing from the SBA, we enter into another round of negotiation or have to wait for the buyer to pursue other options. While it sounds simple, it requires a lot of communication between buyer and seller while the two parties explore the best options to move forward.
Like everything in the franchising world, the sale of a franchise unit differs slightly from the sale of other businesses. It’s essential to work with an experienced franchise lawyer when executing your franchise exit.
Not only do I specialize in helping business owners franchise and protecting franchisees as they purchase a unit, I am also a co-owner in the franchise PLAYLive Nation. My unique experience combined with understanding the business side gives my clients a stronger edge when navigating the hurdles of the franchising world.
If you’re looking to exit your franchise unit, contact me today. Together we can ensure that you are not only protected in the sale, but you are also pursuing the best path forward to sell your business.