Planning Your Franchise Exit
You’ve bought your franchise, and you are now open for business. The next step is to start planning your exit strategy.
While hopefully your exit from this franchise will be far into the future, inevitably you will want or need to move on. Whether it is due to a new venture opportunity, a change in your life’s direction, health issues, family or marital issues, retirement or simply jumping at the chance to capitalize on the many years of hard work that you have put into your franchise, ultimately you will want to sell your franchise. Planning early for that eventual sale will help you maximize the return from the sale.
The ideal time to sell a franchise is when the business is doing well and the market conditions for the particular franchise are advantageous. If you are prepared ahead of time, you will be able to capitalize on this timing sweet spot.
The first step in planning an exit strategy is to read your franchise agreement. More often than not, the franchise agreement includes transfer provisions that set restrictions and responsibilities on the franchisee in the event of a sale of the franchise.
These restrictions could include requiring the potential purchaser to meet the franchisor’s current requirements of a new franchise; entitling the franchisor to an interview with the potential purchaser; requiring the potential purchaser to sign the current form of the franchisor’s franchise agreement; requiring approval on the terms of the sale from the franchisor; requiring financial information of the purchaser including how the purchaser intends to finance the sale; requiring the franchisee to pay off any amounts owed or cure any defaults to the franchisor prior to the sale; requiring the franchisee to pay a franchise transfer fee; execution of a release waiving any potential liability against the franchisor; requiring the franchisee to pay all training costs to train the potential purchaser; the surrender of all client lists; etc.
In addition to this list of restrictions and responsibilities, the franchisor could have a right of first refusal. This means that the franchisor has the ability to step into the shoes of the potential purchaser and buy the franchise under the same terms that are being offered to the potential purchaser.
All of these restrictions and responsibilities may be off-putting to a potential purchaser. It is best to know what they are ahead of time as well as get the franchisor involved in the sale from the beginning.
Some franchisors may have a franchise resale program where the franchisor assists in the sale of the franchise. This assistance could include marketing the franchise, providing sample documents for a letter of intent or purchase agreement, providing a list of leads that might be interested in purchasing the franchise, or generally just providing guidance throughout the entire sale process.
However, the franchisor may not always be very helpful. A franchisee may be competing with the franchisor in the sale of the franchise because the franchisor is also trying to open new franchise operations in the region in which you are trying to sell.
The next step is to get an appraisal of the valuation of the franchise. In valuing a franchise, appraisers will look at current and projected cash flows, controlled business costs, growth potential, the franchise’s assets base and outstanding liabilities, as well as whether there are any contracts in place with key employees. A professional appraisal is important, not only for pricing the business correctly for the market, but also for any required franchisor approval or for the purchaser’s lending institution.
Prior to going to the market, a franchisee should get a due diligence package prepared. This due diligence package should include at least a description of the franchise, sales and profit history, property details, staffing details and equipment and asset details. Before delivering this package to any potential purchaser, the franchisee should get the potential purchaser to sign a non-disclosure agreement.
Next it is time to go to market. As already mentioned, the franchisor may assist the franchisee in finding a buyer. Another option is a business broker. A business broker may charge up to ten percent of the purchase price, but using a broker’s services frees the franchisee up to continue to run the business and make sure that it remains successful throughout the selling process.
A franchisee could find that the best market to sell the franchise is within the pool of employees. Often a manager or employee is a purchaser that already has a good understanding of how the business operates.
In conclusion, it is best to prepare the exit strategy in advance. Get your documents in order, assemble your team of advisors, and hopefully you will go out on top.
Marshall Tinsley is an attorney with Turner Padget (Columbia, S.C.) who counsels businesses in a variety of industries on succession planning, estate planning and related matters. She may be reached at (803) 227-4249 or by email at firstname.lastname@example.org.