When it’s time to say goodbye…

Why do they want to sell?

When a franchisee indicates that they are looking to sell their business, the general assumption is that the business is not performing well. However, more often that not, this is not the case. There are a number of reasons a franchisee decides to sell. A common reason is that the franchisee'''s interest in the business is becoming stale, boredom is beginning to set in, or it may just be that the franchisee is looking for a new challenge. It is also fairly common that the franchisee feels they have reached a ceiling in their current operation and are keen to upgrade to a larger franchise, perhaps even within a different franchise system. Sometimes the franchisee is looking to move either locally or interstate and pursue other franchise opportunities in their region of choice. There have been occasions where some franchisors have offered a franchisee an opportunity to take on a franchise in another state providing the sale of a franchise.

Points for a franchisee to consider before selling:

Once the franchisee has made the decision to sell there are a number of points to consider before putting it on the market. The temptation at this stage may be to sell as soon as you decide you want to sell, however it may be wise to hold off advertising immediately and prepare more thoroughly for the sale. Selling the franchise without adequate preparation increases the risk that the full value of the business will not be realised or it may even be a struggle to find a buyer. You should also understand that the sale process from when you first advertise to when you settle may be 6 months of more - so be prepared to be patient.

Laura Webster, a Franchise Consultant in DC Strategy's Melbourne office, gives the following examples of some of the areas that the franchisee should focus on before putting their business on the market:

Ensuring reporting information is up-to-date:

Looking across the whole market, it is evident that franchisees have tended to be poor marketers of their own business. Many franchisees do not have sufficient information to support the value of thebusiness. Franchisees have traditionally tended to under-report performance and then provide copies of tax returns to a prospective purchaser. Tax returns are not an appropriate document to attract a buyer. When compared with selling a house, where there are tangible assets making it easy to see where the value lies, the intangible assets of a business make it more difficult to easily identify the value. If the franchisee therefore chooses to sell without up-to-date, detailed or accurate information providing a true reflection of the business, it is almost impossible to present the business in its best light.

Ensuring compliance with the operations manual:

A franchisor may have specific requirements for the business such as standards of presentation, which will have been detailed in the operations manual. Some franchisees may have neglected repairs and maintenance, leading to the appearance of a tired and run-down business. It is important to take time to upgrade and/or refurbish, and ensure the business fully complies with the requirements before actually putting the franchise on the market. This is particularly important as the franchisor may have the right to refuse to agree to the assignment until the location is bought up to current standards.

Assignment obligations - ignore them at you peril:

Before considering selling a franchise, it is imperative that the Franchise Agreement is reviewed and discussions are had with the franchisor to inform them of an impending sale. At this point it is an idea to ask the franchisor about what they can do to help with the process or if they can offer guidelines about how best to proceed. Generally there will be a protocol that the franchisor will need to adhere to; for example, specific right of first refusal and new franchisee approval processes. The key is to review the Franchise Agreement to understand the assignment obligation before the sale process begins.

Prepare a well-written Information Memorandum:

Many franchises offered on the market contain poorly presented information with little detail. If the franchisee is at all serious about maximising the sale potential of the business it is absolutely essential to prepare well. It is similar to the concept of selling a house - a neat, well-presented house is far more attractive to buyers than an untidy, poorly presented dwelling.

The franchisee must assume that the potential buyer does not know a great deal about their business and it is important to educate them as much as possible. The buyer is far more likely to make a positive decision when backed up by detailed information, rather than making a more risky decision based on gut-feel without sufficient supporting documentation. It is therefore very useful to produce an Information Memorandum to which prospective buyers have access. The information a franchisee should compile in the Information Memorandum at the very least should include the trading history of the business (2-3 years if possible); sales growth figures; trend lines; a detailed P&L for the previous two years (minimum); typical weekly roster; a map of the location and the surrounding area, highlighting traffic generators and business drivers; and a description of the key features of the business and location. It should also include a summary of the premises' lease.

Security of tenure is where the value lies:

Many franchisees put their business on the market when there is only a year or two to run on the lease and they expect to receive a premium on the sale. It is vital to provide a prospective purchaser with security of tenure. If the remaining lease term is less than 2 years, speak to the franchisor about extending the lease, however in this instance be prepared to carry the legal costs of getting approval for a new lease. Also consider that extending or renewing a lease may trigger a rent increase, which will have to be factored into the potential sale value. It is recommended that there be at least three years tenure on the lease in order to attract a buyer at a premium.

Laura finishes by advising that the preparation of a franchise for sale before putting it on the market is of high importance. It is recommended that a planning program of 6-12 months for exit be allowed in order to maximise the sale potential of the business.

Where to sell a franchise? Where to advertise?

Once the decision has been made to sell and the processes and preparations are well underway it is time to look at advertising the franchise for sale and finding buyers to talk to. Firstly, it is crucial to decide upon the advertising budget, as there are a variety of opportunities available to maximise exposure of the franchise for sale. For example, listing on the franchise for sale websites and advertising on Saturday in the franchise for sale classifieds of the large metropolitan dailies. If a business sales agent is engaged they could post it on their website. Another strategy is to contact existing franchisees in the network or other parties who may have an interest, such as staff or customers. With the franchisors approval a properly worded, professionally prepared sign can widen the net of potential buyers. It is also worth noting that current suppliers could also become potential buyers.

Impact on the franchisor

There is value in franchisors assisting franchisees to exit as fast as possible. For example, the productivity of an employee once they have handed in their notice typically nosedives. In the case of a franchise system, if a franchisee is dissatisfied or unmotivated, or is just looking forward to a break and a new opportunity, this can have a damaging effect on the overall brand if the franchise takes too long to be transferred. Not only could the franchisor be adversely affected through possible damage to the brand but also royalties could decrease from an unmotivated franchisee generating less revenue. As sales decline so do the chances of a sale occurring.

Of particular note to franchisors is the growing trend whereby many prospective franchisees are contacting existing franchisees to find an existing site for sale rather than establishing a Greenfield franchise. It is therefore recommended that a process be established by a franchisor to facilitate the resale of existing franchises within the framework of an overall franchise recruitment, screening and selection process, rather than compete with their own franchises for prospective buyers.

When things go bad

The worst environment in which to sell a franchise from the franchisee perspective is when the relationship with the franchisor has become poisonous. At no other time in the relationship is intense contact and cooperation between the two parties as critical as the point of selling an existing franchise. It is essential that the franchisee has a cooperative franchisor otherwise the process will become very difficult and the outcome may be adversely affected. In fact, those franchisees with difficult relationships with the franchisor will find the task of selling almost impossible. It is worth noting that franchisors are at times the potential purchaser and a franchisee should never discount this option to sell the business back. The cost of the transaction may mean that the franchisee can offer the business to the franchisor at a reduced price. It is therefore in the interests of both parties to ensure that professional relations remain comfortable.

Understand the market at the time you want to sell

Written by Rod Young.

We have all heard the story about the record price some franchisee achieved for the sale of his or her existing franchise in the past. However, times change and you need to benchmark your franchise against the other 15,000 franchises that are for sale each year. What have other franchises sold for in your network in the last 6 months? What is the competition of franchises and businesses for sales in your area? How does the franchisors brand stack up against other offers?

These factors will help you set a realistic price that can be achieved in a reasonable timeframe.

To summarise, put yourself in the shoes of a potential buyer. If you are looking for a franchise business what would your criteria be. Chances are your buyer is thinking the same things.

Rod Young is an Executive Director at DC Strategy. DC Strategy (formerly Deacons Consulting) is widely recognised as the region's leading Strategy, Franchising and International consulting group. DCS has developed the networks and brands of many of the region's most successful businesses. Contact Rod Young at rod.young@dcstrategy.com

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