You want to sell your franchise business but don’t know where to start? Putting a franchise business up for sale doesn’t happen overnight, but franchise resales are a option for operators who want to get out of the business.
Just be mentally prepared. Most business brokers agree it could take 6 – 12 months to sell a franchise. On a brighter note, know that you have options and aren’t married to the business forever. If you’re ready to move on, here are the next steps to take.
What happens if you want to sell your franchise?
Selling your franchised business is a real option. Businesses are bought and sold every day. But it’s not always the easiest process to find a buyer that’s willing to pay a premium price for the business.
The first thing you need to know is that you have to let the franchisor be aware that you’re planning to sell your franchise. Because even though you were the one who bought the franchise, the materials, equipment, signage, and all other supplies may still belong to the franchisor. They will also need to know who you’re going to sell it to so that they have the proper documentation and they’ll know who to coordinate with for future plans regarding the franchise.
So once you decide in selling your franchise, you’ll need to discuss it with the franchisor and move on forward there. The franchisor may also need to approve the buyer and make sure this person has sufficient finances and the right mindset to operate the business.
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You’ll also need to prepare several things like finalize your financial statements, make sure your franchised business goes through the proper valuation, and ready your marketing package which is also known as your business summary. You’ll also need to document ongoing debt payments, lease payments, and other expenses so you’re transparent in all the financials.
But basically, the most important thing is to let your franchisor know. Some franchises may state the terms already in the Franchise Agreement so you can also check the contract and better understand what the next steps will be.
Can I sell my franchise to someone else?
You’re not just selling a business; you’re offering a dream.
Yes, you definitely can. You can sell your franchise to someone else and the following below could be your options:
The Franchisor
As Charista Baye, Co-Owner of Thoughtful Franchise Brokers explains, “Your fellow franchise operators might be your first potential buyers. They already understand the business model and may be looking to expand. Networking within your franchise community can open doors to opportunities that might not be available through traditional sale channels.”
This is the most obvious one out of the many options you may have but also one that’s overlooked at times. Selling your franchise to the franchisor is a good idea because there is a high chance that they have a database filled with franchisees that may want to buy another unit. And yes, franchisees that are interested in multi-units do exist and your business franchise’s location may be the one they’re looking for.
Franchisors may also have a department or team that handles re-selling of franchises so this could be an easy win for you to let them find a potential buyer in no time. This is the first step to take and if everything works out, you could have a somewhat speedy transaction that take 6 – 12 months to close.
Neighboring Franchisees
Reach out to neighboring franchisees if they’d like to buy your franchise. Neighboring franchisees are those that are closest to your location. These franchisees may be interested in buying your franchise for expansion reasons or to cover more ground or territory for their franchised businesses. So it’s always a good idea to approach them and offer your franchise for sale. These people already understand the business operations and challenges of your business model so they are worth contacting by phone or email to gauge interest.
Neighboring franchisees are also a good way to spread the word around that you’re selling your franchised business. Even if they aren’t interested, they might know someone else who is. Business owners know other business owners.
Business Listings Online
Another way to sell your franchise is to post up your business on listings online. There are many websites that handle these like BizBuySell and Biz Quest. These online business listings allow you to post details on the business franchise you are selling and potential buyers are able to look through the listing easily. Online listings come with a fee but they are an effective way to get in front of potential business owners looking to expand or investors.
While listing on BizBuySell and similar platforms can provide exposure to potential buyers, it also brings challenges related to internal and external perceptions, financial transparency, and the overall negotiation process. Platforms like BizBuySell require you to list certain financial metrics of your business, such as total annual sales, revenue, net profit, franchise fees, or labor and supply costs. This disclosure can be a double-edged sword. While it might attract potential buyers, it also makes sensitive financial information public. Competitors might use this information to their advantage.
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If you live in a small town, word the business is up for sale will ripple through the community and people will find out how much cashflow the business generates. This may or may not matter to you, but it’s someone to be aware of before listing.
Keep in mind the impact on management and employees too. When employees discover that their place of work is up for sale, it can lead to uncertainty and anxiety about the future. This might hurt employee morale, as staff may feel insecure about their job.
Local Brokers
In addition to listings and contacting the franchisor, a simpler way to sell your franchise business is to get the help of a local broker. Local brokers usually have connections and a database of people who are interested in buying a franchise. They’re also familiar of what’s going on in the business industry within your area and might know someone who is actively looking to invest in your type of business. They will also charge a percentage of your sale or will have a fee similar to what a real estate agent would get for successfully marketing and selling a home. So be sure to ask all the details first before signing up for the help or assistance of a local broker.
However, you’ll need to be careful in finding a local broker. Seek clarity on how the broker will be compensated. Most brokers work on a commission basis, typically ranging from 5% to 12% of the sale price. Ensure you understand any additional fees or charges.
Your Franchise Manager
Some franchise managers may have big dreams of wanting to own their franchise. However, there may be several factors as to why they haven’t owned one. This could either be because of financial reasons or they’re still trying to gain more experience running a business.
So why not approach your franchise manager and propose for him to buy the business from you? The advantage of this is that your franchise manager already knows how to run the business so you’re assured that your franchise is in good hands once you sell it or turn it over to them.
An earn out financing option can be an effective and creative solution for a restaurant manager looking to buy the franchise restaurant they manage. This approach can be particularly useful when the manager may not have the upfront capital to buy the restaurant outright.
Here’s a short explanation how an earn out financing option can work. The restaurant manager could make an initial payment followed by additional payments tied to the restaurant’s future performance. This method aligns the manager’s efforts to improve the business directly with their ability to complete the purchase, as payments can be structured around key performance metrics like net profits or revenue milestones. This provides a flexible and accessible path for the manager to transition into ownership without the need for substantial upfront capital.
How much should you sell your franchise for?
It’s not just a number; it’s a reflection of your hard work.
As mentioned above, one of the things you can expect to happen when you want to sell your franchised business is that you have to go through a proper valuation of your franchise to know how much it’s worth and how much you should sell it for. There is no one fixed price in selling your franchise. Each one is different which is why this part can be tricky.
So what are the factors you should look out for and that could affect just how much your franchise is worth? Here the factors to consider.
EBITDA
EBITDA is short for “earnings before interest, tax, depreciation, and amortization”. One way to value your franchise is to calculate your business’s EBITDA. This is usually done in financial statements annually or quarterly so this shouldn’t be such a difficult process to go through if you are doing this regularly.
Once you’ve calculated your EBITDA, you can either choose to multiply it by a risk factor or multiply it by the number of years you expect your business to still be running.
For the risk factor rule, you can determine this based on how you deem the business’s surroundings are whether it’s in an environment that’s at a high risk or not. For the latter, you can just do an assumption. What’s important is not to inflate the price of your franchise to benefit you. Remember that you are selling a used and ongoing franchise so the price will not be the same as when you first bought it.
Get a Professional Appraiser
Reality check time. Your business may not be worth as much as you think it is. An appraiser is one who calculates the value of your franchise business as an impartial party. They could value your franchised business depending on the sales of comparable businesses, the income your business is generating, or the value of your business’s assets. Sometimes it’s a combination of all these things.
Remember to only hire a professional appraiser otherwise you might get a wrong valuation of your franchised business.
Ask Your Franchisor
It is always best to go back to where it all started from. After informing your franchisor regarding the reselling of your ongoing franchise, you may also want to discuss if they can help in determining the value of the business. Again, franchisors are usually experienced in this and have a team of people who know how to calculate the value of an existing business so don’t be shy in asking them for their help.
How to sell a franchise?
Challenges ahead, but with diligence and strategy, success awaits.
Now that you’ve decided that you are finally going to sell your franchise, then it’s time to put those thoughts and plans into actions. The goal is not to be stuck forever, right? So where do you start?
Speak with the Franchisor
As mentioned above, always approach the franchisor first to inform them of your intent to sell. Depending on the Franchise Agreement and terms, there may be some certain processes to go through and checking your financial statements and records before the actual selling of your franchise takes place.
Don’t be afraid in scheduling a meeting or speaking with them about your intent to sell the franchise. Franchisors have lots of experience with these and you’re not the only person they’ve dealt with who has decided to sell their franchise.
Get A Proper Valuation
Whether it’s an informal or formal one, getting a proper valuation for your franchised business will help you determine the right price to sell your business. If you want to be really sure, hire a professional appraiser to do the job. Do note that they may ask for a percentage of the sale at the end.
According to Charista Baye, “Getting a professional appraiser for your business is not just a smart move, it’s a necessity. They bring an objective and expert perspective to accurately determine the value of your franchise, ensuring you’re working with real numbers, not just estimations.”
Compile Your Documents
Selling a franchise business requires several key documents to ensure a smooth and legally compliant transaction. Here’s a list of essential documents you would typically need:
- Franchise Agreement: The original franchise agreement you signed when you first purchased the franchise.
- Financial Records: Comprehensive financial statements and records of the business, including profit and loss statements, balance sheets, and cash flow statements for the past few years.
- Tax Records: Copies of tax returns for the business for the last few years.
- Operations Manual: The franchise operations manual provided by the franchisor, detailing the operational guidelines for running the franchise.
- Asset List: A detailed list of all assets that are being sold with the business, including equipment, inventory, and furniture.
- Lease Agreements: If the business location is leased, copies of the current lease agreement.
- Franchisor Approval: Documentation of the franchisor’s approval of the sale, as most franchise agreements require the franchisor’s consent to sell the business.
- Sales Agreement: A draft sales agreement, which outlines the terms of the sale, including price, terms of payment, and any contingencies.
- Non-Disclosure Agreement (NDA): To protect sensitive information, an NDA for potential buyers to sign before receiving detailed information about the business.
- Employee Records: Information on current employees, including contracts and any employment agreements.
- Legal Compliance Documents: Proof of compliance with local, state, and federal regulations (like health and safety certifications).
- List of Current Contracts and Obligations: Including supplier agreements, service contracts, and any other business-related contracts.
Remember, the specific documents required can vary based on the nature of the franchise, the franchisor’s requirements, and local laws.
Publish Business Listing for Sale
You can choose who to sell your franchise to whether that’s to a neighboring franchisee or your franchise manager. But why not widen the search for a potential buyer by posting it up on a business listing? I mentioned BizBuySell or Biz Quest above so you might want to check those listings out and get all your franchise details ready. Remember, the goal is to get more people to know you’re selling your franchise and to spread the word so you can find a potential buyer fast.
Can a Franchise Broker Help you Sell a Franchise?
Yes, finding a broker can help you find potential buyers for your franchise but it does not ensure you that you will get a sale right away. Brokers will need to check their database or ask around as well. What’s great about hiring a broker is that they’ll do all the heavy lifting for you while you can focus on other things such as finalizing the documentation of your franchise business. But just remember to do your research as well and find a broker is experienced so you don’t waste your time.
Patience is very important and handy when you decide to sell your business. It doesn’t happen in a day or two. In fact, selling a franchise can even take up 6 to 12 months. So don’t lose hope and keep in mind to always be active. Update your listings. Continue to talk to neighboring franchisees or communicate with your local broker. With all these tips and tricks you’ll be able to sell your franchised business in as little time as possible.
