Comprehensive advice on buying a franchise resale, and selling a resale, from a variety of industry experts such as Richard Holden of Lloyds and Johnny Sellyn, Franchise Resales US.
Why existing franchises are for sale
As the franchise market in the UK matures, the resale of franchise businesses is becoming extremely common.
There are many reasons why there are franchises for resale in the UK, including:
- The franchisee is retiring
- The franchisee is looking to relocating
- The franchisee has other business interests that they need to concentrate on
- The franchisee, or a loved one, are ill and so they are unable to give a 100% commitment to their business
- Their exist strategy has always been to sell the business after a certain amount of years and to make a profit
- They have realised it is not the right business for them
What sets a resale apart from a new territory?
You may pay a premium for buying a UK franchise for resale, perhaps as much as 30% if the business has a good track record, but if a greenfield site that needs building from scratch is a daunting thought, a franchise resale may be right for you and worth the extra money.
As well as the traditional benefits of franchising, including the training, support and use of a proven business format, when purchasing a franchise for resale you are able to take advantage of actual trading accounts and of course an existing client base, making your future a little easier to predict.
What you should look for
An existing business should be able to show you some actual performance figures, together with any management figures produced. You should also be able to obtain from the franchisor the figures provided to them by the franchisee for verification.
Also seek the advice of an accountant as to whether the sale price represents value for money. If the franchisee has any staff it may be useful to ask them what they think of the business.
Why not also conduct some of your research through the existing client base – after all it is they who will keep you going in the future. Are the customers happy, can you retain them once you have taken over, how can you enhance the customer experience in the future and are there more customers out there?
Pay some attention to the existing franchisee’s relationship with their customers and if there appears to be little loyalty be aware that you may have to rebuild confidence and equate this to the premium that you may be being asked to pay. Conversely, if you find that the franchisee has an excellent relationship with clients, consider a hand over period to allow a smoother and more effective transfer of ownership and of course ultimately success for you!
Why buy a franchise resale
Franchise resales are big business in 21st century and investing in such an opportunity presents certain advantages over a new franchise location or independent business. Nationally renowned Franchise Resales Consultant for Franchise Sales & Resales, Jess Bains, elaborates.
As with any business transaction, when investing in a franchise resales opportunity, it is imperative that you recognise what you are receiving in return for the money paid to the franchisor. While the franchisor does provide assistance in exchange for the fees they receive; not all of them are identical.
Franchisors provide value in different areas depending on the strengths and strategy of their business model. You should identify why you are buying one franchise over others and set appropriate expectations before making your decision.
A franchise Resale provides advantages in the categories listed below:
Established Track Record
When you buy a franchise resale, you are usually investing in a franchise concept, which has products and services that have sold successfully.
You will have trading history to learn from and to support your forecast for the future. Investing in a franchise resale is based on an already existing business model that, in most cases, has worked successfully for the franchise owner.
A franchise owner can profit from the brand recognition that a franchise resale provides. If you start your own business it can take many years to build a brand in a competitive market.
There are no guarantees that the consumers will identify the brand as a product leader. A franchise resale can provide owners with immediate brand recognition.
Instant Cash Flow
An established franchise for resale will offer instant cash flow. If you start a new business it may take anything from 12 to 18 months before your business starts to make a profit. With a franchise resale you have an existing customer base of clients using your services and products.
Most franchises for resale will have experienced team of staff, who will have been trained and experienced in the day to day running of the business.
The existing franchise owner may also stay on for a period of time, enabling a smooth takeover period and to ensure you fully understand the systems and working methods of the franchise resale. The franchisor will provide training where appropriate; a five to 10 day induction course is typical.
It can be extremely costly for an independent business owner to market their business, whereas a franchise resale has the advantage of already having an existing marketing strategy in place.
Also, the franchisor will have a franchise agreement that normally works to supply franchisees with marketing campaigns to ensure customers identify with and remember the brand. Belonging to a franchise reduces marketing costs, which are shared equally with other franchise owners.
Investing in a franchise resale limits the risks that are involved in business, most banks will look favourably upon lending to a franchise resale as opposed to a new business start-up.
Advantages of buying a franchise resale
by Derrick Simpson, Franchise Resales
The statistics relating to the success of franchises bought as sales of existing businesses are becoming well known and are being taken into account by prospective purchasers.
Results of the NatWest/bfa Survey of UK Franchising show that 7 out of 10 franchises acquired over the last two years had been previously operating before they were bought. A clear indication the message about the strength of a resales acquisition over a new “greenfield” location is being recognised as the logical way to buy into franchising.
The stability obtained through taking on a trading business is clear to see:
- Cash flowing through the business from day 1
- Brand presence in the local market place
- Clients and customers from the start
- Stock, staff and property (if appropriate) all in place
- Business to planning is easier to develop from known data
- Smoother funding process due to the proven business history
- The purchaser’s task is to grow what is already there
Developing a business presence in a new territory can be time consuming and costly so the advantage of taking on an existing franchise, that is already known in the area and which has current customers and clients, is clear.
That is not to say growing any business is easy - far from it – but it is easier to move on and drive a process that is already underway. To speed up a rolling ball as opposed to pushing it to start from a standstill position is always the energy efficient option.
The above positive elements which demonstrate why buying a franchise for resale would be a strong option to consider also make the opportunity attractive to secure banking facilities for your new business.
All businesses will usually require some form of banking facility and many will require additional funding most often in the form of a loan. If not a loan then, at the very least, an overdraft facility is usually required to support a level of working capital.
When presenting a structured business plan to the franchise units of a bank to secure these facilities, the strength of the proposal and therefore the likelihood of its being approved will, in part, depend on your business projections.
With an existing business there is clear evidence of what has been achieved by the current owner so projections can be based on fact and this will give considerable weight to the proposal. This in turn will make it more likely to be accepted because the previous trading history and brand presence plus your drive and background all combine with a franchise resale to make this option the logical route into franchising.
How to select the best franchise resale for you
Purchasing a resale franchise can have some great advantages over starting a new business from scratch, but there are also some pitfalls to avoid. Resale franchise units may consist of successful operations that are making money as well as units that are either losing money or barely making ends meet. Whether the existing business is successful or not it can potentially represent a rewarding opportunity for you, but the risk associated with an under-performing unit is substantially greater. Before looking at the various resale opportunities out there, you should consider your own strengths and weaknesses as the potential new owner.
One of the first tasks is to establish the true reason the business is being sold which may not necessarily be what you are initially told. Are the outgoing franchisees ready to retire, just want a change of lifestyle or are they trying to escape an unbearable grind of long hours for little reward. Sellers will be canny enough not to tell you the business is awful, so you're not going to want to buy it from them. They will dress up the business as best they can to achieve a sale at the best possible price. You’ll need to speak with the outgoing franchisee but also to look at other sources of information. Resources available should include the franchisor as well as other franchisees in the network or other industry sources.
Once you’ve established their motivation for selling look at the financial performance over the last few years and the trends. Are the sales growing, stable or in decline? Mature businesses with track records of success that can give you cash flow from day one. The business is already trading so will have customers, enquiries, sales and service delivery from day one, however struggling businesses may have poor relationships with their staff, suppliers and customers which may impact your ability to turn them around. You should ask the franchisor to confirm the information you're receiving from the seller. If the seller is not being honest with you, you'll often pick up clues from comments made by the franchisor. Prospective buyers are advised to fully investigate the business and seek professional advice.
A resale opportunity will suit investors who can multi-task and want to hit the ground running. If you prefer to start from scratch there will be different challenges to face in building a customer base, sales and a local market presence. You should select the choice which you are most comfortable with. A buyer needs to adopt a structured approach to ensure that they truly understand the potential of the business opportunity. The best franchise therefore is the one that most fits a prospective purchasers skills and aspirations. Each person will have a view of what opportunity suits them best. A prospective purchaser needs to see beyond the recruitment hype and drill down to the heart of the business opportunity.
Purchasing a resale will usually be more expensive than a buying new franchise territory. This is because the target business is probably generating an existing profit and the selling owner will be paid a premium for their business. If you haven’t got the required capital from savings then financial assistance is at hand from banks, such as Lloyds, that specialise in the franchise market. This may require you to take out a business loan and usually inject at least 30 per cent of the capital required from your savings.
With a new franchise territory you pay the franchisor an initial franchise fee plus, usually, some training and set-up costs. A new business has to grow from scratch so will not generate profit for a while and will require a high level of working capital to meet the operating expenses as it grows. A resale generates cash flow from day one and, hopefully, generates immediate income for you.
Franchise resale considerations
If you are looking at a buying a franchise in an established and mature network, you should consider buying an existing business from an outgoing franchisee.
Here are some of the key areas you need to think about:
- Why is it selling? - As well as your research into the franchise itself, you will also want to find out about the reasons for the sale – is the franchisee retiring or have they found that the business is not right for them?
- Business performance - Get advice from your accountant. How has the business performed, what do the audited accounts show, is the business profitable? It may not be, if the previous franchisee has underperformed. You need to check if this is just a one-off, or if a large number of the network is having problems?
- Research local market - Assess the market in that area, what is the competition, has something changed which will affect the business (high street pedestrianisation for instance).
- Resale costings - Is the asking price reasonable, look at other businesses for sale in your region and again, speak to your accountant. How long will it take you to repay any borrowing to buy the business? Is that a reasonable payback period? Can the price be negotiated; are all the fixtures and fittings, equipment, stock, etc included?
- Sale considerations - How is the sale being structured? There are two types of sale that the franchisee can employ; share sale or asset sale. These are both very different and it is important that you understand the implications of each. Ensure you seek legal and accountancy advice before committing.
- Personal savings - Do you have enough capital and security to buy into an established business? The costs will be higher than buying a brand new franchise where the concept has not been established. However an advantage of purchasing an existing business is that if finance is required you will have existing accounts to demonstrate to the bank how the business has been performing.
There is a lot to consider, but taking over an existing established business could provide a quicker route to a higher return, and should be generating income from day one.
Investigating a franchise resale
Manzoor K Ishani, Legal Franchise Expert
When considering buying a franchised business as a going concern the purchaser should not drop his or her guard. All the rules which normally apply with the purchase of a franchise apply equally to the purchase of a franchised business as a going concern.
To the extent that it is possible, a purchaser should try to find out the true reason why the outgoing franchisee is selling. It may not be a simple matter of the outgoing franchisee wishing to retire or to do something else. Searches may reveal that there is a development locally (road widening scheme, competitor moving into the market etc.) which may have a serious impact upon the profits of that business.
The purchaser should take the trouble to investigate both the franchise and the franchisor thoroughly.
Apart from the usual queries, the purchaser should try and speak to as many franchisees as possible to get their view as to the profitability and potential success of the franchise and of the support given by the franchisor.Apart from the usual provisions which apply to the purchase of a franchise , there is an additional dimension to buying a franchise business as a going concern.
The purchaser should be aware of the fact that he or she is not only buying a franchise but the business itself and therefore needs to make sure that upon taking over the business he or she will not be liable for the liabilities of the outgoing franchisee, that the outgoing franchisee warrants the past performance of the business etc, and finally, the purchaser needs to be aware that he or she will become responsible for all the employees of the outgoing franchisee and should therefore take steps to protect him or herself against any potential liability from those employees.
Business planning for buying a resale
Researching at the UK franchise industry you may already have picked up that a franchise business is more likely to grow quicker and survive longer than an independent start up, so naturally banks involved in providing funds for franchisees offer more favourable terms to purchasers of franchised businesses than they would to an independent new start up. If you require financial assistance to purchase your chosen franchise you will need to prepare a structured business proposal for whichever bank you approach for funding.
Developing a business presence in a new territory can be time-consuming and costly. All businesses will usually require some form of banking facilities and many will require additional funding. With an existing business there is clear evidence of what has been achieved by the outgoing owner so projections can be based on fact and this will give considerable weight to the proposal. There are clear advantages of taking on an existing franchise that is already established. These advantages also make a franchise resale attractive to secure banking facilities for your new business.
One way to guarantee that you receive relevant, sector-specific support and funding is to approach a lender that has a dedicated franchise team, such as Lloyds Bank. In doing so, your bank manager will have a solid understanding of the challenges that franchise owners are likely will face, and can tailor the most appropriate funding to fit your requirements.
Before your first meeting with the bank manager it is important that an extensive business plan is produced. If you’ve never written a business plan before it is advisable to undertake the Business Planning section of the Prospect Franchisee Certificate which has been jointly developed by Lloyds Bank and the British Franchise Association. This modular training program of informative videos is completely free and can be accessed via the http://bfa.trainme.tv/ site. In addition to covering the financial aspects of franchising the program also provides essential insight into what it takes to be a successful franchisee.
A significant amount of time and effort should be put into your proposal as it is the first introduction the lender will have to your business. The plan should provide a detailed description of the service and products you provide, whilst outlining your objectives and strategy to build a profitable franchise. The business plan should be punchy and a common mistake is to make it too detailed with information that isn’t relevant.
Ensure that it grabs the bank manager’s interest. The bank isn’t looking for a two hundred page document going into microscopic detail however it will expect you to provide commentary on your skills and experience, business objectives, the franchise brand, local market, competitors, potential clients, suppliers, premises, staff, marketing strategy, financial requirements, available security and any contingency plans you may have considered.
The initial objective of the business plan is to help you raise finance. It is also a working document and it’s essential to review your performance against your original projections, alerting you to anything that is not going according to plan as well as identifying potential opportunities for the business.
The plan should demonstrate that you understand the business opportunity and the local market for your product or service. Most banks can provide a business planning template for you. Accountants can also provide advice in producing the plan, but remember it is your document and is too important to leave to someone else to write.
Financial projections for a franchise resale will be based upon the existing trading performance however if you are proposing to increase sales or reduce costs then clearly identify how you are going to achieve this in your plan. Forecasts for a new territory franchise are an even more vital assessment tool. Most franchisors will provide you with illustrations of possible trading performance, but it is up to you to dig deeper. Find out what the financial projections are based upon and the assumptions that have been used.
A business plan is a useful tool to help gather thoughts and set objectives for the business. It should demonstrate that there is sufficient demand for the product or service and that you have a good understanding of the market. It should also set out the competitive advantage or unique selling point your business may have.
Financing a franchise resale
It is good practice to send a copy of your business plan to the bank manager a few days ahead of your appointment to allow them to become familiar with the content. The document should achieve a comfortable balance between being professional yet interesting to the lender.
As your meeting approaches you should have an excellent understanding of your strategy, and it is advisable to prepare and practice a script that briefly introduces your business proposal. This projects a professional image and offers credibility to your proposition, and the depth of your research will allow you to comfortably answer any questions posed. The bank manager will naturally be interested in the operational and financial aspects of your business, and will expect you to be able to respond confidently and accurately.
Think of those entrepreneurs on BBC's Dragons Den programme. From the outset, many don't stand a chance of securing the investment they are seeking because their presentation is poorly conceived, or they don't have a good understanding of the key financial information. Consequently, they are unable to establish their own creditability and project confidence in their business.
Whilst it may seem obvious, it is essential that you are dressed appropriately for the meeting and arrive on time – first impressions count. The combination of a professional approach and a workable strategy delivered by a positive, committed owner will put you in a strong position to secure the funding that you need to launch a successful franchised business.
The level of finance available from a bank will depend upon the strength of the franchise system and brand as well as the business plan you’ve produced. Typically for well-established franchises the bank will lend up to 70 per cent of the total set up costs including working capital. For newer, less established franchise systems the amount of finance available maybe lower.
The bank will probably require security for the loan which commonly will be a legal charge over a residential property with sufficient equity. Don’t be put off they isn’t any security to offer the bank. The Government backed Enterprise Finance Guarantee Scheme maybe available for those who have a strong business proposal, but who lack security that the banks usually require.
It is sensible to have a contingency reserve fund to fall back on in case the business takes longer to get off the ground than originally anticipated.
Lloyds Banking Group continues to approve 80 per cent of customers’ requests for loans and overdrafts, and we have a range of funding options available, which includes “Lloyds Funding for Lending.” This utilises the Government’s Funding for Lending Scheme, and enables businesses to benefit from lowered funding costs on loans and offers a one per cent reduction in the interest rate for new business loans.
Once you have established a relationship with your bank and secured the necessary financial support, it is important to build on this and keep regular communication channels open. Offering regular updates around the progress of your business breeds confidence in your ability to manage your business in the current trading environment.
Self-employment can be a daunting prospect, but hard work, determination and a large amount of common sense will take you a long way towards achieving your business goals. If you set realistic goals and undertake a meticulous planning process, once you have delivered your business plan with confidence and answered all questions knowledgably, you have the basis for a successful relationship with your bank manager as you look to expand into franchising.
It is essential to thoroughly research the opportunity and fully consider the financial implications before buying a franchise. You are entering into a long term commitment and need to get the funding right at the outset. Don't try to press ahead with insufficient capital, putting unnecessary pressure on the business from the outset, but don't borrow more than you can comfortably afford to repay.
Cost of using a franchise solicitor
The amount that a solicitor will charge you for this work will depend upon how complex the transaction is.
It is not really possible to give a meaningful estimate of the cost without full details of what the transaction will involve. Suffice to say that the cost will be appropriate to the value of the deal and without such advice you risk losing a substantial amount. It is however vital that you always seek legal advice for buying a franchise resale.
Even if the current franchisee tells you that they used a solicitor so you do not need to, you must still take legal advice from an experienced franchise solicitor; it is essential that you always use a lawyer who specialises in franchising and is a member of the British Franchise Association.
Franchise resale legal advice
by Martin O’Neill – Solicitor, Wright Johnston & MacKenzie LLP
Prospective franchisees sometimes have the choice between buying an existing trading business from a franchisee, or starting a new business with the grant of a franchise from the Franchisor.
If you are buying an existing business then some additional legal documentation will be required, beyond the Franchise Agreement and its related documents.
Businesses are generally acquired in one of two ways. Either 1. the entity that operates the business sells the relevant assets to the buyer, or 2. the entity operating the business is itself acquired.
It is very common in the UK for a franchisee to be a private limited company. For the purposes of answering this query we are assuming that relevant parties are private limited companies, although franchisees could be, for example, sole traders, partnerships, or limited liability partnerships (LLPs). Private limited companies are acquired through a transfer of the company’s share capital.
There are a number of factors which influence whether buyers and sellers want to proceed by way of a share sale, or an asset sale. These can relate to legalities, accounting, tax, or other practical considerations.
In addition to a Franchise Agreement, a franchise “resale” will require a purchase agreement. This will either be a Business Purchase/Asset Purchase Agreement, or, in the event that the buyer is buying the existing franchisee entity, a Share Purchase/ Share Sale Agreement.
Other relevant documents may include (amongst others):
- Confidentiality Agreements - obliging one or more parties to keep confidential information confidential.
- Exclusivity Agreements - aimed at preventing a seller speaking to interested third parties for a period of time whilst negotiations are ongoing with the prospective buyer.
- Due diligence questionnaires - seeking information on the business and/or entity to be acquired.
- Disclosure documents - used by the seller(s) to disclose information against the warranties contained in the purchase agreement.
- Board Minutes - noting authorisations in respect of transactions and changes to relevant entities.
- Shareholder resolutions
- Consents from relevant parties such as the Franchisor, landlords and lenders
- Release agreements - freeing an outgoing franchisee from its Franchise Agreement (with some important exceptions!))
- Stock Transfer Forms - detailing the transfer of ownership of shares.
- Resignations and appointments of directors
- Agreements relating to employees and directors
The above list of documents is not exhaustive and of course not all of these documents will be relevant to a particular transaction. When provided with the relevant information in respect of your intended purchase or sale, a franchising solicitor will be able to provide you with a breakdown of the costs involved in respect of the various documents required.
An experience of the franchise industry will mean your adviser will be able to help you navigate through the sale process with confidence, and provide franchise specific commercial guidance beyond the legal technicalities.
Refusing a franchisee consent to sell
There is a provision in most franchise agreements that outlines if a franchisee wishes to sell their business then they must seek and receive the consent of the franchisor. It does however also stress that the franchisor should not unreasonable withhold giving permission to sell.
What if the franchisor does not like the buyer (the incoming franchisee) or feels that the price it is willing to pay for the business is too high?
Possible financial failure
The point about the price is that if the buyer buys at a price which the franchisor considers to be too high, it may have a very difficult time of making a success of the business.
The margins and the turnover may just not be there to support a purchase price of that nature. It may be a case of the buyer having more money than sense and a franchisor may feel very strongly about granting consent to a sale in circumstances which it believes will lead to financial failure.
In any event, the franchisor is going to have to show that it has reasonable grounds for refusing. Certainly the point about the business being over-priced will be easier to prove than its point about not liking the buyer. The test is going to be an objective one and unless the franchisor can reach some accommodation with its franchisee, a judge will have to decide, something neither of them wants.
Buying with the intent to sell at a profit
Most franchisees buy a franchise with a dream in mind. For some of them that dream is also their ultimate objective, which is that after a number of years of hard work and dedication they will have built up a business, which they will eventually be able to sell. Surveys have shown that around 13 % of franchisees buy a franchise to increase their investment.
Franchisors encourage prospective franchisees in this dream. However, in commerce as in life, things are seldom straightforward. Franchisees who buy on a promise from the franchisor that they will be able to sell often forget that any such promise was coupled with certain conditions. Certainly most franchise agreements are very clear about such conditions.
However, at the time of buying a franchise, franchisees are concerned about other things. They are concerned to secure the franchise and start the business, and having established that, whether they have the right to sell, but do not concern themselves too greatly about the fine detail of the conditions. So what exactly are these conditions? Most are what one would expect:
- Training the buyer
- The payment of the franchisor's costs and (sometimes but not invariably) some sort of fee by way of franchise transfer fee
- Obtaining the consent of the franchisor
- Rights of first refusal in favour of the franchisor (sometimes)
Most seem innocuous enough but the devil, as they say, is in the detail. The condition which creates the most difficulty is the one which requires the franchisee to obtain the franchisor's consent.
Ensuring standards are maintained
Franchisees need to be reminded that one of the prime objectives of a franchisor is to ensure that standards are maintained, and this means ensuring that all franchisees satisfy the franchisor's criteria with regard to ability, skill, financial strength, character, etc.
Just as franchisors are very careful in the selection of their initial franchisee, so they are keen to be equally careful in approving an incoming franchisee who buys from an existing one.
Were they not so careful they would soon find themselves with a sub-standard network of franchisees, many of whom would have acquired their franchise from an existing franchisee. It makes sense therefore that all prospective franchisees, irrespective of how they came to be prospective franchisees (and this includes candidates introduced to franchisors by brokers, consultants etc.) satisfy the franchisor's criteria for franchisees and pass the same rigorous tests.
Those franchisees, while accepting the underlying reasons for the imposition of such a condition, nevertheless feel uncomfortable about the franchisor retaining total discretion as to whom they can sell their business. It is a circle that cannot be fully squared and franchisees usually content themselves with having to rely on the reputation of the franchisor by talking to existing franchisees and doing their homework to see whether or not in the past, the franchisor has exercised such powers as it has retained, reasonably.
Past conduct is of course no guarantee as to future conduct, but it is now by and large accepted practice that most prospective franchisees rely on the reputation of a franchisor amongst its franchisees.
It is not all one-sided in favour of the franchisors. One has to remember that a franchisor has little to gain by being obstructive and in my experience there has been virtually no abuse of such a condition by a franchisor.
As always a distinction has to be made between those franchisors who are ethical and those who are not. Prospective franchisees therefore need to take care to investigate the franchisor's track record and background thoroughly, and to take proper advice on the franchise agreement, because the same set of conditions can have remarkably different effects when operated by different franchisors.
For the buyer the big question is – if it knows that the franchisor is dead against the idea why would it want to persist in its proposed purchase?
© Manzoor G K Ishani. All rights reserved.
Manzoor Ishani is a Senior Consultant Solicitor with Sherrards (Solicitors), a commercial practice advising franchisors and franchisees in the UK and internationally. He has specialised in franchising for more than 30 years and is a former member of the Legal Committee of the British Franchise Association and is co-author of “Franchising in the UK”, “Franchising in Europe” and “Franchising in Canada”, and has helped UK companies franchise into more than 27 countries.
Valuing a franchise resale
The sale and purchase is based on the value of the assets and goodwill of the business. Normally, the value of the assets is based on their realisable value i.e. what the assets could be sold for in the open market, whereas goodwill is normally based on the future profit potential of the business.
The price is the amount that a willing buyer will pay to a willing seller. Often this is a multiple of the business profit but getting to the right multiple is the skill and will vary from industry to industry.
An investor purchasing a resale should expect to recoup their initial investment together with a return based on the increased value they achieve for the business during their period of ownership.
A starting point is to look at the return on investment; if you are looking for 20% (to reflect the risk of investing in the business) then this would equate to a multiple of 5 times profit (i.e. you might invest £200K for a return of £40K).
It's never as easy as this in practice as you need to look at the maturity of the business, its dependence on key customers or staff, the assets employed and so on. If you need help in valuing a business you can take advice from an experienced bfa afffiliated accountant.
Getting consent for selling your franchise
By Dr Mark Abell – Co-Head of Franchising and Licensing Practice, Field Fisher Waterhouse
When you buy a franchise you are entering into a long term relationship with the franchisor. A franchise agreement will usually state that your relationship with the franchisor is for a fixed number of years and may then be renewed, subject to a number of conditions.
The franchisor grants you the franchise for this period of time because, after carefully vetting you and your suitability to operate the business, it has decided that you are the right sort of person to run the franchise.
Recruiting franchisees is often the most time consuming and costly part of a franchisor's business. Recruiting the wrong sort of franchisee can have disastrous results for both the franchisor and the franchisee.
Steps to selling a franchise
by Derrick Simpson, Franchise Resales
Once you have the thought that you may like to sell the business the first step is to inform your franchisor of your decision. They may be able to source a purchaser for you, though most will charge a commission fee for this.
Any potential purchaser will require a whole range of information about the business before they are in a position to discuss price with you. This information should be provided in a Prospectus of Sale and should include:
- A description of the franchise, what it does and how it works
- Potted history of your business
- The sales history and adjusted profit history
- Details of any property
- Details of any staff
- Details of any equipment
- Copies of 3 years accounts and up to date management accounts
- A realistic asking price
The franchise prospectus
The prospectus is your sales document. Whilst it is designed to sell the business, it must represent an accurate view of what is being offered and must not contain any misleading or false information.
In Franchise Resales we use a template Prospectus document to ensure we cover the main features of a business to enable us to advise on valuation and prepare recruitment advertising.
Once a potential purchaser has been found, before providing any confidential information, you should arrange for them to sign a non-disclosure/confidentiality agreement. Once signed you can provide your Prospectus of Sale and other supporting documents and commence negotiations.
At some stage in this process the prospective purchaser must meet the franchisor to be approved as a prospective franchisee. You should agree with your franchisor when they wish to do this. At Franchise Resales we work with franchisors to seek prospective purchasers only that fit the “ideal profile” for their particular franchise opportunity.
Once agreement in principle on the purchase of your business has been reached between you and your purchaser you should exchange emails confirming the offer for the business and your acceptance of this offer.
A franchise solicitor
Solicitors will usually be needed to complete the legal transfer of the business in question and, though this is not always necessary for small value resales, our advice is always speak to a solicitor before deciding – better to be safe and use a solicitor. It is important however to only use solicitor firms with experience in the resale of franchises and which are bfa members.
Exchange of contracts usually takes place prior to the franchisors training course for the new franchisee and will usually occur the week prior to the course. This however is not set in stone and will vary from franchisor to franchisor. You should confirm this with your franchisor.
The purchaser must usually attend, and pass, the franchisor’s initial training course. If for some reason they are unable to attend training or fail to pass the assessment then the sale may not complete as it is likely your franchisor will not allow them to take on the franchise without training.
Prior to completion of the sale you may be required to instruct your solicitor to give an undertaking for the payment of any outstanding fees, commission charges etc for which undertakings have not previously been given.
All suppliers or providers of leased equipment will need to be notified of the impending transfer in time for the new franchisee to be able to set up credit accounts with them so the business can proceed without pause once completion takes place. Discuss this aspect with your franchisor.
Without the relevant legal undertakings throughout the business transfer process, transfer of ownership may not be authorised by your franchisor.
Completion is the day that all relevant funds are transferred and the new franchisee takes over your business. This usually is straight after the training franchisor’s course.
You may well be required to attend the business during the first week or so to introduce the purchaser to your customers and possibly be on call for a few weeks thereafter.
The entire process can be stressful as most people only buy and sell a franchise once. You may consider using Franchise Resales to manage the process with you and to take some of the day to day hassle away whilst you focus on the continued growth of your business during the resale process.
Types of existing franchise sales
If you are looking to purchase a franchise that is part of a well established system, then you will probably be looking at an existing franchise.
There are two types of sale that the existing franchisee can employ; share sale or asset sale. These are both very different and it is important that you and the seller understand the implications of each.
In a share sale, you purchase shares in the trading company. The ownership of the company changes, but the trading business stays exactly as it was before the sale.
In an asset sale, the trading business is transferred from the seller to you. After completion of the sale, the seller will be left with a shell company (subject to any assets or liabilities that the buyer chooses not to take), the other business and assets having been transferred to you. The business is operated by you through a different legal entity.
The asset sale is probably the easiest for all parties concerned as it gives the flexibility to pick and choose which assets and liabilities will transfer; however a share sale is typically more tax efficient for the seller. To put this in perspective, with the right structure a share sale may incur a Capital Gains Tax liability of 18%, reduced to 10% as Entrepreneurs Relief is likely to be available. An asset sale could incur a tax liability of over 50% as Corporation Tax is paid by the company on the sale price and then Capital Gains Tax or Income Tax is paid by the individual extracting the profit from the company.
Share sales pose a greater risk to the buyer as they will inherit all liabilities, known or unknown. This can include tax due, property liabilities and possible litigation by customers or staff. Therefore, buyers will need to gain a thorough understanding of exactly what they are acquiring before committing themselves.
Financial agreements in place
Another area that must be considered is if there are any existing finance agreements in place. With an asset sale there will be a change in legal entity and the lenders consent would be required. This is not the case with a share sale but ‘change of control’ provisions are becoming increasingly common, which allows the agreement to be terminated.
If the franchise operates from premises then there are further issues to consider. If an existing lease is to be assigned to the buyer, the landlord’s consent will be required. This consent is also required for an asset sale and Stamp Duty Land Tax will be payable, another cost which must be factored in.
If the franchisee employs staff, then the type of sale chosen will impact them in different ways. If you want to reduce the number of staff, in an asset sale Transfer of Undertakings Protection of Employment (TUPE) rules will apply but this is not the case in a share sale as the employment contract continues as before.
In summary, there are pro’s and con’s to both the asset and share sale options, with sellers usually preferring a share sale whilst purchasers tend to prefer the simpler and less risky asset purchase.
It is essential that you take legal and accounting advice at the outset and consult with the franchisor throughout the process.
Past questions for buying a franchise resale
Qu: I am currently in the process of selling my franchise to one of my staff members and would like to ask two questions please.
As I am currently 1 month over my 5 year contract agreement, so technically out of contract and I haven't resigned a new one, do I have to pay the franchisor’s application for consent to sell fee of £2000?
And as the person buying is currently a staff member and fully trained, do I have to pay the fee for the staff member to be trained by the franchisor?
Answer: The question you put, about the terms of the agreement, is straight forward on one level but less so on another.
The fact your Franchise Agreement has expired does not matter as regards the terms of it insomuch as the principles of franchising and contract law state that if you continue to operate the business past the expiry date you are deemed to have accepted you will be covered by the terms of the agreement on an on-going basis as long as the franchisor allows this to go on. So whatever the agreement states still applies.
(On a general point it is always better to re-sign than go out of agreement as this provides you with more security and makes the business more attractive to potential buyers. You still have the right to sell whenever you wish so to do).
The less simple answer is that given your particular circumstances, and depending on your relationship with your franchisor, they may waive the fee element about franchisors consent – as this is usually applied to cover their costs interviewing and approving candidates on your behalf. Given your buyer is a member of staff, and assuming the franchisor has approved the transaction, there is little for them to do in terms of candidate approval. They do need to approve the buyer even though they are staff so this is an important step in the process.
With regard to training, I believe every new owner should go through the franchisors training programme because it covers the franchisors view of exactly how the business should be run and at this point they can ‘train out’ any non-system habits you may have adopted whilst your ran your franchise. Again depending on your relationship you may be able to persuade the franchisor to provide a truncated or bespoke training process at a leaser cost. Again this is where cultivating a good relationship with the franchisor pays dividends.
Looking at it from the franchisor point of view, they want to ensure that whoever takes over from you will do better than you have and will continue to grow the business in the future so that is the angle to use when speaking with them.
Qu: How critical is it to have defined your exit strategy prior to initially setting up the franchise (for franchisors)?
Answer: As a franchisor the timetable from inception to exit will (or should) be far longer than that of a franchisee. The average lifespan of a franchisee in the UK is around 7 years whereas the same measurement for franchisors is often stated in decades - or certainly a couple of them. That said, essentially the same rules apply to a franchisor or a franchisee - plan and set out your long term strategy from the outset.
The process for franchisor exits is very complicated and the final ease of exit and value obtained will vary depending on the sustainable operating profit generated excluding the profit gained through the sale of franchises. This is important as the value of a franchisor is based on sustainability of fee income not the income generated through recruitment making the point of exit well beyond the breakeven point of the business. Another key point is the consistency of the Franchise Agreements so ensure they are crafted by a fully British Franchise Association ( bfa) accredited solicitor. The final point is to always run the franchise as if it is for sale so ensure it is always attractive to whoever you consider the target purchasers or, as we did with Franchise Resales Limited, grow your own purchasers who will take over through an MBO.
Before launching it is important to obtain the services of a competent bfa accredited consultant such as Gti Consultancy or The Franchise Development Centre who will lead you through the step by step process and will also be able to advise on long term goal planning. The bfa also run a number of seminars for its members covering franchisor exits and the planning for them. Derrick Simpson, Founder, Franchise Resales
Qu: I have a cleaning franchise which I want to sell as I am wishing to retire. The franchisor in my opinion, and that of others wishing to sell, is that it is not being helpful with the resale. The advert for resales is placed on one website which is not well known and is very hard to find if you are searching on the internet. The problem is this is a franchise with an allegedly good reputation and the CEO is a member of the BFA. In other words, it looks like a closed shop - this is not good. It is quite obvious to me and others that they do not care about the franchisees who have worked hard and made them money over the years and have no interest whatsoever in getting them a good price for their business. How would you suggest to proceed with putting your case forward to this company that it is in everyone’s interest to be more helpful in selling the business for the franchisee? I am also aware that you are probably aware of the company I am talking about and the CEO and may also have no interest in my case. So it will be interesting to hear what you have to say.
Answer: Many thanks for your question. My apologies for the delay in responding as I have been away on holiday only retuning this week.
The question you raise is not unfamiliar to me as many franchisors main focus is growing their network though new franchisee sales rather than focusing much support on those planning to exit. That said I fully understand your frustration when there isn’t much effort being demonstrated by the franchisor.
The whole relationship with your franchisor is defined by your franchise agreement (FA) – to a certain extend that is the only document that matters – so within your FA there should be a series of clauses (usually around clauses 15 to 20 somewhere) which sets out the franchisors obligation with regards to your resale. It is likely to be restricted to having to approve the prospective purchaser unless they find the prospect for you in which case they will most likely charge you a fee. There should be no restriction upon you seeking your own prospective purchasers though the franchisor may still impose a handling fee of some level – usually a percentage of the selling price. Given you state your franchisor is a bfa member their FA should follow this approach
As regards addressing the position with the franchisor I would suggest an open and non-confrontational discussion about how you can plan for your exit and retirement given your wish to do so. They should let you know you are able to find your own prospects for a sale and instruct an external firm to work with you on this, always remembering the franchisor has to approve the candidate, then you are free to follow that line of action.
Qu: I purchased my franchise and started it in May of this year. It did not start brilliantly and has not got any better. I have asked the franchisor for help as what they promised with the system provided has not worked leaving me basically earning no revenue.I have now decided to call it a day but they are telling me that I have to continue if I want to sell the business on or if I walk away it reverts back to them to sell and make more money. I explained to them that I could not afford to do this as it is costing me too much money. I do not think the support and training provided has lived up to the standard that they advertised.
Could you advise me if I have any grounds for a settlement from them also I spoke to someone who provides the system that was put in place for me and they said it is not really sufficient for what we are using it for.
Answer: I sympathise with your situation as it seems the franchisor is not being overly supportive of your position. This is definitely a situation which requires a legal opinion as it is not possible to advise a course of action without having a copy of the franchise agreement for your particular franchise and all the correspondence to hand. Logically you will have four options; find a purchaser for your business yourself, get the franchisor to find a purchaser for you, cease to trade or work with the franchisor to trade out of the position and continue.
Your first port of call needs to be a franchise specialist solicitor (please don’t just use a local lawyer) and if you look on the British Franchise Association website www.thebfa.org. there is a list there. I don’t think you should make any decisions without this specialist advice.
It will be important to retain a working relationship with the franchisor regardless of whatever route you decide to take.
Qu: My wife and I own our own profitable master franchise photography training business. We are thinking about a long term exit strategy, and also help in putting a value on the business. Do you have any experts who could help us with this?
Answer: There are two organisations that can help with your longer term planning depending on where you are with your thinking.
Firstly if you wish to spend a few years growing the business further with a view to an eventual sale then The Franchising Centre offers a Value Builder programme. www.thefranchisingcentre.com. This provides a consultant to work alongside you over a period and running regular review with you to ensure growth. They don’t however currently provide the process for the final sale and crystallisation of your value.
If you are reasonably happy with how it is running etc. then my company Franchise Resales Limited will be able to take what you have and prepare it for sale in due course. www.franchiseresales.co.uk. (though we do not openly advertise ML’s and Franchisors businesses on our site) We would also discuss value with you either directly or through a firm of associated accountants depending on your choice. Should you wish to explore this further then please let me know and I will arrange to meet with you.
Qu: Hi, we are looking to sell our lawn care franchise quite quickly. Where can we find a broker that isnt too expensive but sucessful?
Answer: Selling a franchise is not unlike selling a house insomuch as it needs to be prepared and presented effectively in order to attract a purchaser. Therefore seeking to do this “on the cheap” will most likely mean you will be disappointed. Read more about using a franchise broker...
Qu: My husband and I are thinking of purchase of a resale of UK care franchise. now they would like us to buy as share sale although they have always said it would be an asset and goodwill sale. What shall we do and what are the risks for share purchase.
Answer: You asked about share sales and whether there are risks attached. As is often the case there is no simple answer to this. A seller will be usually far better off financially (post sale taxation) if they sell the shares in a business rather that the assets/goodwill. A purchaser will have a smoother entry into the business because all the staff, assets, property, leases and contracts all transfer to the new owners as part of the share sale process. There is, for example, no TUPE transfers for the staff to go through. This is especially helpful where, for example, CQC accreditation is required. In some care franchises the franchisor stipulates the sale must be a share transfer process. Read more about care franchise resale...
Qu: I am looking into buying a particular franchise. I have been offered the opportunity to buy the existing business that has been trading for 14 months as the owner wants to continue growing the company.
They have asked for that I sign a confidentiality agreement and give a £2000 deposit to look at the financial information such as turnover and profit etc (although they have already given me a rough indication of turnover).
Could you advise whether this is normal practise for selling a business as a franchise? Obviously it seems strange to me that they are asking for £30,000 to invest in a business that I haven't seen the figures of. If the figures don't add up and I choose not to invest, or I cannot get financial backing etc, then I lose £2,000.
Also, I would surely perhaps struggle with getting the financial backing if I do not have that information. The signing of the agreement I have no problem with but I am very unsure about the money. What is your advice?
Answer: I think you are wise to be cautious. Signing a non-disclosure agreement is one thing (and must be insisted upon by the selling franchisor) but no one should be asked to pay a deposit, especially a non-refundable one, just to see the figures of a franchise business for sale. Read more on franchise deposits
Qu: I would really appreciate your help and advice on the following two questions. I am considering buying an existing franchise which is 3 years into its 5 year lease agreement. If I were to buy it and in 3 years time wish to resell the business, I guess as it would then be on a rolling contract and therefore its value would then be significantly less? Or if I was to walk away from the franchise, could I continue the business under a private name within the same area?
Answer: The usual process when purchasing a franchise resale is for the selling franchisee’s franchise agreement (FA) to be terminated at the point of completion of the sale and a new FA issued to the purchaser by the franchisor. This is done for the benefit of both parties. Read more on buying into an existing franchise
Qu: I am interested in acquiring an existing franchise. I would like to understand the risks associated with this transfer especially to someone who is new to this industry and also most likely to the area of the franchise.
Answer:Purchasing an existing business has many benefits as I am sure you realise. Cashflow from day one, an existing brand presence in the local marketplace, a client base etc etc. Clearly there have to be downsides also but mostly these can be minimised with careful screening of opportunity. Read more on Franchise risks
Qu: I am looking at buying the remainder of an existing franchise licence which is being sold for personal reasons (the franchisee's son is very ill and she needs to commit time to him). I understand that a five year licence is usually £8k plus VAT and the existing franchisee is asking £4k in total for the business, plus equipment, for the remainder of her licence which ends in April 2013. She has some established business, but admits that she hasn't marketed it to it's fullest potential due to her personal circumstances. This is a totally new area for me, I am about to be made redundant from a role as a personal assistant, but am very interested in being my own boss and working with children in a business which fits around my own family life.
Answer:Whilst the circumstances of the proposed purchase do have an emotional element it is important to remain dispassionate and view the business objectively. Read more on evaluating the franchise resale
Qu: I have a franchisee who wishes to sell their business. They have approximately 18 months left on the term. They have an interested party. If they choose to buy the new franchise do they sign a new five year agreement? Am I entitled to any of the money from the franchise sale?
Answer:The best advice for franchisors when selling an existing business is to terminate the old agreement and start afresh with a new agreement with a new franchisee. Your solicitor will be able to draft a simple termination letter for the outgoing franchisee.
This process means you are constantly updating your franchise agreements and extending the general term of the franchise as each one that sells will in effect be a new agreement so all will eventually roll on.
There should also be a sale and purchase agreement between the seller and buyer.
As with regards fees your franchise lawyer that drafted the original agreements will have discussed a resales clause with you and the sums you can or cannot charge will be in the current agreement under the resales clause.
Derrick Simpson, Franchise Resales
Qu: What is the best way to value a franchise resale
Answer: Most resales are valued by their ability to generate sustainable operating profit. That is the amount of money somebody buying the business could reasonable be able to generate if they ran the business in the away it is currently. This operating profit does not include any owner’s drawings, pension provision or other costs of a personal nature to the owner. It also would not usually include interest payments or any tax payable.
Most accountants would average this out for the last three years with a weighting towards the latest results. They would then apply a multiple to that average figure to arrive at an asking price. Typically, for small businesses, multiples these days range form 1.5 times to 3.5 times depending on the industry sector. Read more on How to value a franchise resale
Qu: I have question regarding Franchise license renewal - When you buy a franchise, does the franchise fee you paid only cover a certain period, e.g. 10 years, meaning that you are buying a franchise licence for just 10 years. Then after the 10 year period if you still have a store running, you have to pay the franchise fees again?
I feel that it is very one sided term. If you still have a store and have invested £100k+, then you are left with no option but to pay the asking renewal franchise fees.
It would be appreciated if you could clarify whether this is common for franchise business or not.
Answer: It is usual, certainly with franchise brands that are members of the BFA, not to charge renewal fees or only to charge a small fee to cover any legal expenses involved with renewal of your franchise agreement. The logic being that if the franchisee is trading well and paying regular on-going fees to the franchisor why would an ethical franchisor wish to penalise the franchisee for remaining within the system.
If you are considering a franchise that charges high renewal fees then you should seriously consider whether this is fair and whether it is ethical and speak to a BFA accredited solicitor about this.
Franchisors of course do have the right not to renew when a franchise agreement expires if the franchisee has not fulfilled their obligations under the terms of the agreement or is in breach of the agreement - which usually means owing them money. Any renewal will be using the then current form of the Franchise agreement not necessarily the version originally signed.
Derrick Simpson, Franchise Resales
Qu: I am looking at buying a well known children's franchise which I have known well over many years as a customer. The current owner bought it 2 years ago and it is now loss- making, having been very healthy 2 years ago. I am most interested in the legal requirements here and have been told we will each need to retain our own solicitor to transfer the business at a rate £2000 for a business sale agreement and further £1000 for the franchise purchase. Does this sound reasonable and necessary?
Answer: The best advice is always to transfer the ownership of a business through a legal agreement and that of course means engaging solicitors which do, as you state, cost money. That said most people would not consider a house sale or purchase without a lawyer involved to protect their interest and the same applies with a business sale.
The level of detail that is required will vary depending of the scale of the business involved and its complexity and as you have only stated it is a well know children's business I would guess it is smaller rather than a larger operation. You also state it is loss making so the selling price is low.
I would always take legal advice and always use a solicitor that is affiliated and accredited by the bfa. To find a list of these go to the bfa web site www.thebfa.org and look under the "Help and Advice" section.
If the sale is being done through the franchisor, rather than from the selling franchisee that may give you the confidence to waive a solicitors input. That said the fees you quote are quite reasonable for legal advice.
Derrick Simpson, Franchise Resales
Qu: I run a Domestic Cleaning franchise with an annual turnover in the region of £55K with outgoings less than £10K.
I am considering selling in the next few years and would like an estimate of the resale price of my business.
Answer: Most resales are valued by their ability to generate sustainable operating profit. That is the amount of money somebody buying the business could reasonable be able to generate if they ran the business in the away it is currently. This operating profit does not include any owner’s drawings, pension provision or other costs of a personal nature to the owner. It also would not usually include interest payments or any tax payable.
Most accountants would average this out for the last three years with a weighting towards the latest results. They would then apply a multiple to that average figure to arrive at an asking price. Typically, for small businesses, multiples these days range form 1.5 times to 3.5 times depending on the industry sector.
In the cleaning sector the level of multiple will depend on whether the enquiries/contracts are provided by the franchisor or if you have established your own customer base.
Given the basic information you provided you indicate this operating profit level to be around £45K. If this is consistent over the years and is not totally reliant on you as an individual then you may be able to achieve a reasonable multiple. Clearly this is a very rough view as I am not aware of the brand, what it costs to set up a new franchise, how it operates or the business structure you operate. All of this would be needed to be able to provide an accurate calculation.
Derrick Simpson, Franchise Resales
Qu: I am looking at a franchise resale. The asking price is about £10,000 more than the launch price.This is to purchase the goodwill of the ongoing customer base. What criteria should l use to value this?
Answer: When a business is sold by an existing franchisee the value of the Goodwill business is usually calculated as a multiple of the transferable profit that business generates. Transferable profit is that which the buyer can reasonably expect to continue to make and so excludes items such as tax, interest and any money taken out by the owner. That multiple can be anything from 1.00 times to 4.00 times depending on the business and the sector in which it operates.
The original franchise set up price is not usually taken into account when reaching a valuation because this is charged by the franchisor to cover the initial franchise fee, their costs in establishing a new franchisee and pay for their training.
You do not say if the business is being sold directly by the existing franchisee or by the franchisor on their behalf. However the value of any business, at whatever level of investment, is that which a purchaser is willing to pay and valuation calculations can only ever be a guide to indicate the right 'ball park' for the offer.
Derrick Simpson, Franchise Resales
Qu: I am nearing the end of my franchise agreement (5 months) and I am looking to sell the business and do something different. I would like to sell the 'Asset Value'.
My question is how do I value the franchise re-sale? I have been to a number of business transfer agents and they say that I can only value the resale based upon net profits and not on a multiple of net profit plus initial franchise fee. Is this correct? If this is correct then a potential new franchisee could purchase a franchise resale for less than a new one with no revenue stream, which does not make any sense! I am missing something here? I have been making a technical loss of £10K after drawings/expenses etc?
Answer: The advice you have been given is totally correct. The value of a resale, whether franchised or not, is based on that businesses ability to generate transferable operating profit (profit before drawings, tax etc). You are not able to add on the franchise joining fee when you launched the business because that was for the franchisor to grant you the licence, train you and support you during the initial trading period and has no bearing on the ongoing profitability of the business.
The reason this is not done is that a business is expected to generate profits from its effective operation and driving by the owner. A purchaser will look at this profit and take a view on how much they will pay for that business based on what they see. They usually apply a multiple to the average profit for the past few years and make a judgement based on that calculation. Some franchisors will re-charge the joining fee to your purchaser anyway, though many franchisors do not do this.
You are correct that a franchise which has been run at a loss it may well sell for less than the original fee paid to set it up. This would be an unusual situation but may, from what you write, be the situation in your case. In these circumstances I suggest a dialogue with your franchisor to see if there is a mutually agreeable approach for them to help you to exit their franchise.
Derrick Simpson, Franchise Resales
Qu: What fees should i expect to pay the franchisor or a broker, if i want to sell my franchise?
Answer: Many thanks for your question about fees chargeable by brokers and franchisors when selling existing franchisees businesses.
The easy answer is that franchisors can charge whatever they put into the Franchise Agreement which a franchisee has signed (this is why one should always consult a bfa accredited solicitor before signing). They may be willing to discount any fees but may not charge more than that stated.
The more complex answer is as follows:
Typically a franchisor will have two types of fee applicable to a resale of a franchises business.
1. The Transfer Fee: This fee is payable to compensate the franchisor for the time and trouble they take to allow one franchisee to go and to take another one on. Sometimes this is a lump sum of money such as £2,500 - £5,000 or so, and sometimes it is a percentage of the selling price, typically 5% these days.
2. Commission Fee: This fee is payable in addition to the transfer fee if the franchisor sources the purchaser. Typically this would be an additional 5% making the cost to the selling franchisee 10% overall.
I have come across combined transfer and commission fees of up to 25% but these would be rare in franchised operations that are members of the British Franchise Association. The bfa have some pretty strict rules about ethical franchising and very high fee structures do push these boundaries.
If you use an external business transfer agent/business broker they will be acting for you, so you would be deemed to have found your own purchaser, and therefore only the franchisors transfer fee would be applicable. Brokers typically charge between 5% and 10% of the selling price as a fee and many will charge an upfront commitment fee though this is often discounted from the final fee charged. Most will have a minimum fee payable in any transaction.
As a selling franchisee you should therefore expect to pay around 10% in terms of fees plus some legal fees depending on the complexity and structure of the sale.
Derrick Simpson, Franchise Resales
Qu: Can l ask why there are so many greeting card franchises for resale; are they not good franchises to invest in?
Answer: There are a number of greetings card franchises being offered as resales but given the size of the market and the number of franchisees involved in the various greetings cards companies, it really isn’t that high a number.
Most mature franchise organizations will expect to have a turnover of franchises each year with many reaching around 10% of the network strength. So if a franchisor has 60 franchisees they could expect to have around 6 or so for sale at any one time. With six or seven franchisor networks within the UK it is easy to reach quite high numbers of potential resales in a single sector each year. Certainly it doesn’t mean there is a flaw in the business model or concept.
Some franchisors do not publicly advertise their resales and only introduce prospective franchisees to a resale once they have applied to join a network and been approved. They may also use an external agency such as my company Franchise Resales to facilitate the resale process for them. It is a healthy process for franchise networks to have a number of resale as this demonstrates the lifecycle of being a franchisee, provides an eventual exit route by being able to capitalise on your investment and hard work. It also brings new franchisees into a franchisors network to grow the individual businesses further. It additionally provides the opportunity for new franchisees to buy into an existing business with all the benefits that brings, rather than having to start up from scratch with a new operation.
Derrick Simpson, Franchise Resales
Qu: When buying an existing franchised territory from an established franchisee, is it common practice to pay in full upon signing? The franchisor provides training and is expecting it's own franchise agreement to be signed at the same time, but as it is stakeholder and reserves the right not to let the purchaser operate the franchised territory if deemed unsuitable, so I consider paying the purchase price in full long before completion, and actual business handover, to be unethical. What is normal practice in these situations when the franchisor is not selling the whole package yet still has an interest?
Answer:The usual practice is that the seller receives the full payment, less any agreed deductions, upon completion of the sale. This usually takes place after training has been completed and the new franchisee has “passed” the training course. Most franchisors will reserve the right to disallow a sale to complete if the candidate fails to perform on the course.
Also it is good practice for franchisors to insist on the Franchise Agreement being signed prior to training as this protects their processes and knowhow and quite often they ask for their franchise fee or training fee to be paid at this time. It is however hardly heard of that the full transaction value of a resale would be paid prior to training – the seller may ask for a deposit at this stage to show good faith.
The usual process is that a Sale & Purchase Agreement (SPA) has been drawn up by your solicitor, passed to the seller’s solicitor for agreement and then finally agreed between the parties. Often (and I always did this when I was a franchisor) the franchisor will wish to be a party to the agreement and either OK or alter the terms agreed. The SPA goes though an exchange process (just like a house sale) the purchaser goes on training at that point and the sale completes post training when the money is paid (again just like a house sale).
Any variation from this process should be clearly explained.