As a business broker and franchise adviser, I have helped dozens of single- and multi-unit franchise owners as they plan and implement their exit plans. In laymen’s terms, I help owners put their business on the market, find a willing buyer, and facilitate the sale at a price and terms acceptable to both parties.
There are literally hundreds of potential pitfalls in the process which can delay the transaction or, at worst, cause the deal to “implode” up to the moment the transaction is scheduled to close. Having witnessed many of these pitfalls, I wanted to share the following three key mistakes franchise owners make when selling their business and how to avoid them.
1. Don’t DIY (Do It Yourself)
I recently replaced several sections of cedar fence in my yard. I’m a handy guy. YouTube videos helped me prep (looked easy enough!). After dropping a few hundred at the local big box hardware store, I was ready. When it came time to dig out the fence posts I realized I was in over my head…WAY over my head. They were sunk two feet down, encased in concrete and surrounded by arm-sized roots making excavation a herculean task. In short, after investing considerable time, money and effort, I realized this project was not within my ability.
As the story above illustrates, many times what seems easy to an outsider often requires the insight and abilities of someone who has skills, tools and experience honed through years of practice. Though the idea of selling their own business may sound appealing to many franchise business owners, the reality is often filled with far more challenges and struggles than originally anticipated.
2. Unrealistic Expectations
Before selling your franchise business, clarify your expectations around:
- Sale Price: A professional adviser working along with the franchisor is critical in helping establish an initial listing price. While shooting for the stars is great, if your listing does not generate responses in the first week or two you need to be prepared to start making changes until you see multiple, high-quality inquiries.
- Time: Of businesses that sell, the average time on the market is about eight months. Larger, more complicated businesses take a little longer; smaller, simpler businesses a little less. An expectation to exit your business in less time is not reasonable. If circumstances dictate a fast transfer, concessions on price may be your best course to encourage the sale.
- Roles and Responsibilities: Make sure you and your broker/adviser are clear about who does what and when. Your broker requires a lot of information prior to listing your business and then updates (ex. monthly updates to P&Ls) to make sure he/she is communicating the most recent information to prospective buyers.
3. Poor Communication with the Franchisor
Your franchisor has input before allowing your franchise license to be transferred. Many franchisors have written guidelines that must be followed to release your license to a prospective buyer. When you take steps to sell your business, your interests and those of your franchisor may not remain aligned.
The critical things to consider:
- Involve the franchisor early in the process: If possible, let them know of your desire to exit your business when you put it on the market. Many franchisees feel most comfortable doing this through their area developer or other regional rep.
- Request a checklist or guidelines from the franchisor: Your adviser needs to help you complete all of the items on this list. Missing information will put the franchisor in a position to prevent a buyer from being awarded a franchise, going to training, and taking over your business. Request a confirmation from the franchisor for each item on this list as it is completed.
- Get it all in writing: Check if your franchise agreement has a buyout or guaranteed royalty clause that obligates you to make additional payments. Did the franchisor agree to waive all or part of the franchise transfer fee? It is critical to document, in writing, your discussions with the franchisor. A lack of documentation can delay or stop your sale if the franchisor is missing what they need to transfer your license.
Selling a business is a long and complicated process. Selling a franchise adds another level of complexity. In addition to the suggestions above, plan ahead well before you want to put the business on the market and make sure you have the support of professionals who understand the unique nature of owning, operating and selling a franchise business.
By, Matt Walles, Director of Business Development at Red Book Solutions, Business Adviser and Franchise Sales Expert; specialized in assisting in the purchase of new franchise or existing independent or franchised businesses and the development and execution of successful exit strategies.