8 Key Steps for Selling Your FranchiseAugust 6, 2018
Selling an existing franchise is commonly called a franchise resale and it’s a big step for any franchisee. After all, you’ve invested a lot of energy and money making your business a success.
So, when the time comes to sell up and move on, you’ll want to achieve the best possible sale for your business. How do you do this?
Below we reveal what to expect from the sale process and how to get the best outcome for you.
1. Consult Your Franchise Agreement
Selling a franchise can be a daunting prospect. Where do you start? What should you do next? Do you even have the right to sell on the open market? The answers to these questions and more should be explained in your Franchise Agreement.
Your Franchise Agreement documents your rights and obligations to sell the business. So, give it a thorough read before doing anything else! Pay special attention to the sale of business clauses. Any actions you take to sell must comply with the terms of your Franchise Agreement.
It’s worth hiring a specialist lawyer at this stage – A franchise lawyer will accurately interpret the terms of your agreement and explain any obligations you must meet.
2. Discuss Selling with Your Franchisor
Selling a franchise typically involves three parties – the seller (you), the buyer (incoming franchisee) and the franchisor. The franchisor has final say on the sale and the buyer must meet the franchisor’s criteria for prospective franchisees. Therefore, you must inform your franchisor of your intentions to sell.
The franchisor’s involvement in the sale also has many benefits for you. They may provide training and support to help you with the sale process. For example, the franchisor may have a conveyancing team who can:
- Advertise your franchise for sale
- Advise on and set the sale price
- Deal with any negotiations on your behalf, and
- Put you in touch with potential buyers
Be aware: In some cases, the terms of your Franchise Agreement will not allow you to sell on the open market. Instead, you may be obliged to sell the business back to the franchisor. If in doubt, seek legal advice to clarify your position and rights during the franchise resale.
3. Share vs Asset Sale
There are two types of sale associated with selling a business:
Share Sale – You sell the business in its entirety. This means the buyer would acquire the assets as well as any liabilities associated with the franchise.
Asset Sale – In this case, only the business assets are sold, meaning the buyer does not take on legal responsibility for the liabilities. Each party can pick and choose which assets are exchanged.
With an Asset Sale, exactly which assets are transferred is negotiated as part of the Heads of Terms. So, it’s important to decide what you want to sell. Consider this carefully to avoid retaining ownership of any unwanted assets post-sale!
For example, if your commercial property lease is not transferred to the buyer you would retain responsibility for the lease and rental space, even after the sale has completed. This means you’d be paying rent on a commercial property you no longer need. So always choose a buyer who wishes to purchase the key assets you want to sell.
Be aware: Transfer of commercial property is subject to the terms of your commercial lease. You will need your landlord’s consent to transfer the commercial lease to the buyer. Seek legal support to ensure all your assets are successfully transferred as part of the sale.
4. Prepare for Scrutiny
Potential buyers will carry out due diligence on your franchise. This means they’ll thoroughly research and investigate your business’ performance. So prepare for a flurry of questions about how you run your business.
The types of questions you’ll encounter include:
- Is your franchise profitable (buyers will want to see evidence of the business’ financial performance)?
- Why are you selling?
- What is the franchisor like?
- What do you think of the training and support offered by the franchisor?
- Do you have an established customer-base?
- What’s the wider-industry and competition like?
- Can we see your business plan?
- Requests for details of current assets, such as any property and equipment leases
Just like selling a house, you should ensure your business is in tip-top condition before putting it on the market. Review your commercial contracts and accounts to ensure they’re up to date and accurate. This way you’ll be prepared to answer any questions that come your way.
At Goldstein Legal, we can review your business’ commercial contracts to ensure they’re legally compliant. Find out more about our Legal Health Check service here.
5. Warranties & Indemnities
As well as answering due diligence questions, you’ll need to provide seller warranties and indemnities.
Warranties – These are true statements you make to the buyer about the business. Your warranties should show that the franchise has been well managed. They should also disclose any existing liabilities, such as outstanding debts or open litigation cases. The buyer can then make a claim if there is breach of warranty.
Indemnities – These are promises you make to compensate the buyer for losses they accrue for specific events that may occur after completion.
These provisions give the buyer a level of protection from risks and liabilities. In many cases, buyers are willing to pay a higher price for a business that has adequate warranties and indemnities in place.
Always seek expert legal advice, before agreeing to any warranties or indemnities, to protect yourself from financial loss later down the line.
6. Sale & Purchase Agreement (SPA)
This is the legally-binding contract that, once signed by all parties, commits the business sale to go ahead.
The SPA lists all the agreed terms and protections of your sale transaction.
Key features include:
- The agreement to sell and purchase
- Confidentiality obligations
- Warranties and indemnities
- Release Agreements
It’s worth noting that many fanchisors provide pre-written SPAs that you can use. These templates can be useful but every franchise resale is different. So, make sure the terms of your SPA reflect your business objectives and protect your interests. This is where strong negotiation really counts!
Your commercial lawyer can carry out negotiations on your behalf and review the SPA, before you sign on the dotted line. Click here for more information.
7. Release Agreements
The Release Agreement is important because it frees you from the contractual obligations listed in your Franchise Agreement. It means the franchisor can no longer make claims against you, post-completion of the sale.
Be aware that if you fail to sign an adequate Release Agreement you could be lumbered with unexpected debts and legal issues later down the line. So, pay special attention to this provision in your SPA.
8. Completion and Celebration
The end is in sight! Once the final terms of the Sale & Purchase Agreement (SPA) are agreed upon by all parties, it’s time to complete the sale. Completion occurs once all relevant monies have transferred and each party has signed the SPA.
This is why it’s so important to achieve sale terms you are happy with – A strong SPA means you will feel ready to celebrate the sale completion with gusto, knowing your franchise is in safe hands!
This list isn’t exhaustive and is meant only as a guide to the franchise resale process.
If you’re thinking of selling and would like to discuss the legalities with our expert legal team – get in touch for a free initial consultation.