Avoiding 8 Franchise Resale Mistakes
Selling your franchise business is something that you, and virtually every franchise owner out there, considers or intends to do some day. Selling the business is usually the most desirable and commonly expected outcome when the time arrives for a franchise owner to move on.
However, selling a franchise is not a simple task. There are many factors to consider, and it is easy to make costly mistakes when selling a franchise business. We want to help you, a hardworking franchise owner looking for a smooth franchise resale. So, here are 8 common pitfalls to avoid when selling your franchise business
1. Being unfamiliar with the franchise agreement. It is vital for franchise owners to understand their franchise agreement prior to taking the franchise resale to market. You need to consider factors such as transfer fees, the franchisor’s first right of refusal, qualification and training requirements for new franchisees, non-compete guidelines, and other agreement details. You don’t want to appear uninformed when talking to a prospective buyer, or worse yet, be caught off guard on a major issue when you are approaching the closing table.
2. Showing the burnout: Often times the factor pushing a franchise owner over the edge is a general and overwhelming burnout. You may have a great franchise, making great money, but these two success factors don’t necessarily mean you are able to continue down your current path. Frequently, burnout comes from other life challenges such as divorce, health issues, financial stress, or family needs which no longer make continuing in your business a viable path.
These are perfectly acceptable reasons to move on from your franchise business. However, even if you are burned out or discouraged you must display and maintain positive, attractive communication about your business. This includes interaction with your employees, your business broker if you are using one, your franchisor, your fellow franchisees, and especially any prospects interested in your business.
3. Being behind on financial statements and tax returns: Any serious and quality buyer will complete a thorough due diligence process and evaluate every important facet of your franchise operation, including your financial reports and tax returns. Any lender providing financing for the purchase of your franchise business is also certain to want these items. Paying your accountant to complete or update your financials or complete your tax returns is a worthwhile and necessary investment when it comes to selling your franchise. Unless you are offering a fire sale, you will need current financial statements and tax returns or good buyers will quickly become disinterested.
4. Neglecting the books. Commingling income or expenses from other businesses or personal transactions with your franchise business makes it very difficult for a prospective buyer or lender to have confidence in the actual financial performance of your business. Any lack of confidence on the part of a buyer turns them off or lowers the price they are willing to pay. Sellers need to be able to easily explain and prove personal expenses or other discretionary transactions that are run through the business. The same is true for cash sales. Having unreported cash sales is less likely in a franchise operation, but claiming there is significant cash revenue without having evidence for it does not help justify or increase the sales price. In fact, a buyer will likely expect a price reduction for any revenue that is not reported or can’t be verified.
5. Misunderstanding the realistic value of your franchise. You may already have a pretty good idea of the value of your franchise if your franchisor provides a rule of thumb for valuing franchise resales in their system. Not all franchisors provide this, but it sure can save a lot of headache when one does exist. If this information is not provided by your franchisor, then it is worth researching what other similar businesses have sold for, and perhaps even talking with someone who can offer you an unbiased valuation. Many business brokers will do this for a fee, or even for free if they believe you may eventually choose to list your franchise for sale with them.
6. Communicating poorly with the franchisor. Depending on the relationship you have with your franchisor, you may want to discuss your plans with them so that they can answer questions and provide you with important information as you take your franchise resale to market. Don’t be alarmed if they are not jumping for joy to help you plan your exit or if they appear more eager to sell new units. The best and most credible franchise brands know and understand the value in helping their franchisees into a profitable resale when the time comes. However, they aren’t always experts in franchise resales or properly resourced to handle it for you. They may be supportive, but they may not be excited to see their good people move on – even if it gives the franchisor a new opportunity to bring in strong new franchisees with a vision to grow. Working collaboratively with your franchisor will help ensure a smoother sales process.
7. Being unprepared to negotiate. No one will value your franchise business the way you do. You have invested time, money, and effort beyond what anyone else has invested, and others cannot fully value or appreciate your blood, sweat, and tears. Each prospective buyer will view your business differently and will make offers and negotiate accordingly. It is important to not view offers that aren’t full price as an insult, but as an opportunity. If the offer is coming from a qualified buyer, you now have the chance to show off your franchise and make them want it. This is good news!
It is also important to consider in advance the items you are willing to concede and how much you are willing to concede. This will take pressure off you during negotiations. Consider the minimum amount of cash up front you will require from a buyer, how much you are willing to seller finance, how long a transition period you are willing to provide, and what type of non-compete terms you are comfortable with.
8. Underestimating the time and effort required to market and close a franchise resale. Like so many other things in life, the time, energy, and expense required to sell an existing franchise are often more than expected. If you are serious about selling a franchise business, it will require focused intentionality. Having the right information, maintaining the proper mindset, creating a good plan, and taking action are each critical steps to successfully selling a franchise operation!
Franchise Flippers is the world’s premier franchise resale marketplace where serious franchise buyers and sellers connect to get deals done. If you are a franchisee, franchisor, or business broker with at least one existing franchise operation to sell, let Franchise Flippers help you with our franchise resales tips and resales platform! Contact us today to see how we can help you successfully buy, sell, or grow your franchise operation. www.franchiseflippers.com