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What Is Involved In Selling A Franchised Business?

Steve Fitzgerald


Contributed by Steve Fitzgerald

People like black and white answers to their questions. Unfortunately, the question as to what is involved in selling a franchised business is not one where a one-size-fits-all answer will suffice. It fully depends on what the franchise agreement and any amendments state with respect to the rights and obligations relative to a potential transfer of ownership.

Some of the things that you are likely to find are:

First Right of Refusal:  In many cases the franchisor has a "first right of refusal" to buy your franchise upon whatever terms and conditions you have negotiated with an independent party. The existence of such a clause means that few buyers will be interested in pursuing your business, as they run the risk of doing all the investigation and review and then being left on out of the picture. Anyway, you need to know whether or not the franchisor has such a right and, if so, if the company intends to exercise it.

Right of Approval:  Most franchisors have the right to approve a successor franchisee with respect to financial, business and other qualifications. These "rights to approve" typically have teeth in them to the extent that the agreements state that any unauthorized transfers of ownership terminate the franchise agreement. In many cases, the approval is also accompanied by additional conditions, such as obligation to enlarge, upgrade, open an additional location, etc.

Transfer Fee:  Most franchise agreements require an 'approved successor owner' to pay a transfer fee to the franchisor. In most cases, it is not a large amount and is generally considerably less than the fee paid by the original franchisee.

Training or Other Requirements:  The backbone of most franchises is 'standardized methods of operation', and therefore many franchisors require that new, inexperienced operators agree to attend and complete franchisor-sponsored training before they are permitted to assume ownership.

Term of the Franchise Agreement:  Few franchise agreements are in place forever, with most having expiration dates, and some having options for renewal.  Therefore it is very important to have either a relatively long term left on your franchise agreement when you go to sell, or to already have renewal options negotiated and in place, and transferable to a new owner.

These are some of the primary issues that you will have to understand and possibly deal with in the sale of your franchised business.  You should also find out if your franchisor actively resells franchise locations and what the track record is in doing so. Some franchisors have good programs in that they are typically always advertising for brand new franchisees and thus have prospects for existing franchises. However, the reality is that most franchisors are far more interested in the sale of new locations (with large front end and real estate related fees and profit potentials) than they are in the resale of an existing location.

About The Author:  Steve Fitzgerald is a business broker in the San Diego area assisting business buyers and sellers throughout Southern California. You can reach Steve by phone at 858-320-0474.

Posted on August 15, 2011  |   Email This Blog Post   |   Print This Blog Post   |  All Contributions From Steve Fitzgerald

 Categories: BizBen Blog Contributor, Franchises For Sale, How To Sell A Business, Selling A Business
 

Comments:

Great synopsis I work with many Subway franchise transfers and find that their process is very well done and systematic, making my life easier, especially since they are the Lessee and will sublease to a bona fide franchisee. Of course they have stack of paperwork to sign.......

Posted by: Fayaz Karim

At first look it seems like a major project to sell a franchised company, because of all the requirements. But what is nice is that there is a prescribed way to go about it. It's likely easier to go through this than dealing with a landlord--at least some landlords, because the franchisor is set up to handle transfers and knows the drill. With a lessor who hasn't been through this, the seller has to wait while Mr. Landlord or Ms. Landlady talks to a lawyer and six friends to decide what to do. Also, it's nice if the franchisor can provide that seller with a ready-made buyer--someone who has inquired about the franchise and maybe has been pre-qualified.

Posted by: David H.

Here's a question that can come up when you're selling a franchise. The buyer may want to know if the franchisor owns the property and if not, what kind of lease is there. It's an issue because in some cases, the franchisor doesn't have fee simple rights to the property and doesn't have much longer on the lease. That can make the particular franchisee's business worth very little. We've seen this with the oil companies in particular. And even if the franchisor has a long term lease, what happens if the landlord has a mortgage for the property and then defaults. Does the lease have to be honored?

Posted by: Steve C.

My attorney says the FTC has been pretty hard on franchisors in the past few years as far as getting them not to abuse their franchisees and people who want to buy out franchisees. So there are fewer abuses than there used to be. A franchisor runs a risk of legal trouble if they get greedy and want a big transfer fee before they'll approve a sale.

Posted by: Jeff K.

For all the reasons stated here, and considering that it might be hard to find someone to buy your franchise rights when you want to sell, I think buyers of franchised businesses should look at what will be involved if they want to sell in the future, before they decide to buy in the first place. A popular franchise that is relatively easy to sell is going to be worth more for just that reason than one that you're going to have trouble getting rid of when it's time to do something else.

Posted by: Louis Tek


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About This Blog
Peter Siegel, MBA is a nationally known consultant and author - with over 25 years experience on the topic of selling, buying, and niche financing (the purchase of), small to mid-sized businesses. His clients include: business buyers, business owners/sellers, small business advisors, and business brokers.
This Blog contains observations, tips, news, events, and case studies relating to selling or buying a small business.
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