Franchisors: How to Manage Successful Franchise ResalesSeptember 10, 2018
There are many reasons franchisees decide to sell their franchise – retirement, relocation or the simple desire for a fresh challenge (to name just a few). Selling an existing franchise is commonly called a franchise resale.
As the franchisor, it’s important to have a system in place to support your franchisees through the resale process. Your involvement will aid a smooth transition between the seller and buyer (incoming franchisee). This will ultimately protect your brand and the wider franchise network.
Below, we explain what you can do to encourage smooth franchise resales within your network.
1. Know who’s Involved (and what’s in it for them)
The sale and purchase of an existing franchise involves three core parties – the seller (current franchisee), the buyer (incoming franchisee) and you, the franchisor. As the franchisor, you will have the final say on the sale.
Franchise resales have the potential to benefit all those involved. The seller has the chance to realise the value of their business. The buyer will take on an established franchise, which often means cash flow from day one. And for the franchisor, a successful resale is a powerful marketing tool – it shows franchisees the long-term gains of investing in your model.
2. Third Party Involvement
Selling an existing franchise also involves a variety of third parties, including:
- Introducers – Anyone who introduces potential buyers to your seller e.g. franchise consultants. This said, many franchisors have a pipeline of suitable prospective buyers, allowing the franchisor to act as ‘introducer’ themselves.
- Financiers/Lenders – Potential buyers should have acquired the financial means to purchase the franchise before entering into sale negotiations.
- Legal representatives – The seller and buyer should each hire an independent bfa-affiliated lawyer to guide them throughout the resale process (more on this below).
- Accountants – A great deal of financial information is analysed and exchanged throughout the resale process. So, the seller and buyer should each hire an independent accountant who is experienced in franchise resales.
- Landlords (and superior landlords) – The landlords will need to approve the transfer of any commercial property assets to the buyer. This is especially relevant in asset purchases (more on this below).
3. Asset vs Share Sale
So, what exactly will be exchanged as part of the franchise resale? This depends on the type of sale:
Asset sale – Only the business assets are sold. Exactly which assets are exchanged is negotiated in the Heads of Terms. This means each party can pick and choose which assets are exchanged.
Share sale – In this case, the entire company is sold. This means the buyer acquires the business assets as well as any liabilities associated with the franchise (e.g. debts).
The transfer of commercial property will require the landlord’s consent. This is always the case in asset sales. In a share sale, whether or not you need the landlord’s consent will depend on the terms of the commercial lease.
Beware: Acquiring the landlord’s consent can often cause delays in the sale because landlords usually have no vested interest in transferring the lease – they don’t mind who’s paying the rent so long as it’s paid! This means getting the landlord’s consent can be a lengthy process. Avoid this by encouraging franchisees to get the landlord’s cooperation early in the resale process. The sooner you have consent to assign the lease, the sooner the sale can complete.
4. Franchise Agreement: Sale of Business Clauses
The franchise agreement is arguably the most important document in any franchise resale. It sets out the rights and legal obligations of the franchisee and franchisor. Importantly, the contract should include a sale of business clause stipulating exactly how franchisees can and can’t sell their franchise.
Key features of the clause include:
- Whether or not franchisees can sell on the open market
- If they are required to sell the business back to the franchisor
- What support they will receive with the sale from the franchisor
- How they should market their resale
- How much of the sale profits they are entitled to (and what percentage of the sale the franchisor will receive)
In short, nothing should come as a shock to your franchisees because all the key details about their legal obligations to you should be set out in their franchise agreement. This is why it’s so important to have a well-drafted franchise agreement in the first place.
5. Seek Independent Legal Advice
You should use a specialist franchise lawyer to draft your franchise agreements and the associated ‘sale of business clauses’. They will have the expertise to produce a robust contract that thoroughly protects your commercial interests during a franchise resale.
Your new franchisee should get their franchise agreement reviewed, before signing it. This should be a bfa-affiliated franchise lawyer who can clearly and accurately explain the terms and obligations set out in the contract. This will also ensure franchisees understand your expectations, plus their rights and obligations to sell the business in the future.
In video above, Roz Goldstein explains the franchise resales process and offers tips for a successful sale.
6. Choose a Buyer Wisely
Approving a buyer is the most important decision you’ll make in a franchise resale. Whoever you choose will run the franchise once the sale completes. So, you need to be sure they’re up to the job.
Always meet the prospective buyers in person before approving the sale. What are their plans for the franchise? Do they understand the terms of their franchise agreement (and will they keep to them!). Most importantly, are they capable of running the franchise and making it a success?
It’s common practice for prospective buyers to sign a confidentiality agreement. This way you can safely share data and information with them about your business operations.
7. Sale & Purchase Agreement
This is the legally-binding contract that, once signed by all parties, commits the business sale to go ahead. It will contain all the sale terms and protections (e.g. seller warranties and ‘non-compete clauses‘) agreed during the sale negations.
As the franchisor, your lawyers can draw up a Sale & Purchase Agreement (SPA) template that can be used for all franchise resales within your network. This ensures the SPA includes provisions that protect your commercial interests and those of the wider franchisee network.
The seller and buyer may request certain changes to the SPA template to reflect terms agreed during the sale negotiations. This may be necessary as every resale is unique. However, you (franchisor) should approve all modifications to the SPA template before sale completion.
8. Put it in the Operations Manual
Once you’ve established a clear franchise resales system, put it in your operations manual! The exact content and format of your operations manual will depend on the nature of your business. However, the most effective manuals include everything franchisees need to know to successfully run their franchise and sell it.
Your manual’s dedicated franchise resales section should include the points we’ve discussed above. Many franchisors also include tools to help franchisees calculate the approximate value of their franchise. This helps them decide if it’s the right time to sell and how to achieve a fair price for their business.
As you can see, selling a franchise is an exciting, yet complex process. So, it’s always a good idea to provide franchisees with the support and guidance they need to achieve a good sale outcome. Your involvement will help deliver a quicker, smoother resale that benefits everyone.
Goldstein Legal provides expert legal advice to franchisors and franchisees throughout the franchise resale process. Get in touch for a free initial consultation.