Selling a franchise
Selling a Franchise in the UK
There are many reasons why people who own franchise businesses choose to sell them. Selling a franchise usually has nothing to do with the quality of the particular business, but as with the previous reasons often has to do with the owner. In some cases it is because they have found a better opportunity and a use of their time, while in others they have lost interest or ready to retire.
Regardless of the reason, for a franchise buyer, acquiring a franchise that someone else is selling, is usually a great way to start off in business. Franchises that are for sale come with existing customers, locations, and sales, allowing the new owner to generate cash flow and a return on investment from the day they open the door.
For entrepreneurs who are ready to sell their franchise, there are usually plenty of willing buyers. Like a stand-alone non-franchise business, the resale value is dependent on the ability of the business to earn a return on investment. The following are some of the considerations to take into account when selling a franchise business.
- Exit Planning – With any business there is a great deal of planning necessary to exit, and sell to a new owner. The first and most important part of exit planning is to work with your accountant and other team to determine the best tax structure for the deal. In some cases it is better to sell the business, and in others the assets of the business. The later is usually the case when the sale price of the business will be particularly high, as the tax rate the company will pay on asset disposal is much less than the rate paid by an individual. Either way a consultation with a financial professional is required to help put the house in order, and prepare for the sale.
- Management Exit Planning – Unless you as the present owner wish to stay on and work temporarily for the new owner, management staff will have to take on many of the roles of the franchisee in day to day operations. This can mean hiring a new higher paid manager, taking a pay cut, and restructuring the management of the business.
- Valuation – Once the exit planning and management structure is properly set up for an exit, it is time to figure out the valuation of the business. This means working with a business broker and accountant to add back in certain non-cash expenses, and remove personal expenses billed into the business. In some cases where there are a lot of cash transactions in a business, the financial statements may understate its value. Planning for an exit may mean running all of the cash previously not reported to the tax authorities, through the business in order to increase its net earnings.
- Hiring a Resale Broker – Following the valuation and due diligence a resale broker needs to be hired. This resale broker will help to put the market price on the business (not the same as valuation) this is the price you will ask from prospective buyers.
- Franchisor Approval – When selling a franchise transactions are closed subject to a number of conditions. One of these is the approval of the franchisor. The franchisor will want to conduct its own due diligence on the buyer of the business. This will be to ensure the new owner is a suitable candidate to run the business, have enough cash on hand to manage expenses, and are ready to undergo the appropriate training program. If the franchisor is unsatisfied with the buyer they can reject the transaction, or if they are satisfied approve it. Often franchisors have the right in the franchise agreement to buy the franchised business back by matching the sale price in your buyers offer.
- Legal Framework – Once an agreement has been reached a franchisee selling their franchise will need to work with their lawyers to draw up the paperwork. This helps them approve the conditions, and any seller financing on the deal that may be used by the buyer to take over the business.
- Financing – If the buyer is having trouble securing financing the seller can finance the deal by turning the business over for a down payment. The business and its new owners will make payments to the seller plus interest for the agreed upon term. This is a great way to ease the sale of a business with few hard assets.
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