Many franchisees make the cardinal mistake of not looking far enough ahead when they enter into a
franchise agreement. They find themselves caught up in the excitement of getting their new enterprise underway, and forget that there will almost certainly come a time when they will want to sell and exit the business - hopefully at a profit. It is a safe option for potential franchisees to seek the advice of a
franchise lawyer to advise them of considerations for the future.
Yes, franchised businesses can be sold at a profit! They're just like any other business and, if they have been performing well, the sale price typically reflects their healthy earnings/turnover.
Running the business from day one on the understanding that it will eventually need to be sold at a profit is a prudent strategy. To do this, the following issues need to be addressed:
- Keeping proper books of account. As part of its due diligence investigations, a buyer will almost certainly want to see the books so they can make their own assessment of sales, earnings potential and likely future profit. In some states, vendors are required to provide prospective purchasers with a disclosure document, which contains financial information. Where this requirement is not mandatory, keeping good books is a wise thing to do anyway.
- Where the franchise business occupies leased premises, consideration needs to be given to how much of the lease remains. If the existing lease is going to run out soon after the business changes hands, and there are no options to extend it, the sale price will be much lower than would otherwise be the case. This is a particular problem in shopping centres where the major landlords only offer fixed initial terms of five or six years, with no options to renew. In such circumstances, the franchisee may need to negotiate additional tenure or, where the franchisor holds the head lease, the franchisee may need to approach the franchisor about commencing such negotiations with the landlord. Because negotiations typically take time, this process should be started sooner rather than later. Landlords often seek rent increases and refurbishments in exchange for additional tenure and these can also bring the sale price down.
- Irrespective of whether the franchise business is conducted from leased premises, the term of the franchise agreement is also a relevant consideration. Generally speaking, a purchaser only gets as much tenure as is remaining at the time of sale. Accordingly, the purchase price will no doubt reflect whether there is enough tenure for the purchaser to recoup their investment and obtain a return on an investment.
- Will the purchaser be offering to employ the vendor franchisee's staff? If not, consideration needs to be given as to how much notice employees must be given, and the size of any redundancy payments that may be necessary. Such payments will also affect how much profit the franchisee can make from selling the business.
- The vendor also needs to quantify any tax liabilities that may arise from the sale. Typically, these may include capital gains tax and, unless the franchise business is being sold as a going concern, GST.
- Many franchise agreements require the franchisee to first offer the business to the franchisor on the same terms and conditions as those on offer to a prospective purchaser. This can slow down the sales process because the franchisor is usually given a certain period to consider the offer. If a sales contract is entered into with a prospective purchaser, it will need to state that it is subject to both the franchisor's option to purchase, and their consent to the prospective purchaser.
This article appears courtesy of
Mason Sier Turnbull.
5-Oct-2007