Finding the right buyer for a franchise resale

Renowned entrepreneur motivator and author of the ‘E’ Myth, Michael Gerber, says one of the main reasons for owning a business should be to sell it. Despite this, some franchisors seem to think their franchisees are going to be around forever. But they’re not.

Why franchisees sell

Franchisees will want to sell. The top ten reasons for this, in no particular order, typically are:

1. The business is not making enough money;

2. The franchisee is not enjoying the work;

3. The franchisee is not getting along with the franchisor;

4. The franchisee becomes burnt out or tired;

5. Personal reasons (death, divorce or drugs);

6. The relationship between the franchisor and franchisee has soured;

7. The franchisee has suddenly become entrepreneurial;

8. The franchisee wishes to pursue other interests;

9. The franchisor can’t teach the franchisee anything anymore; and/or

10. The franchisee wants to ‘cash-out’ at the right time.

The first nine of these are negatives and should be dealt with by the franchisor very carefully. The worst-case scenario, under these circumstances, is where a franchisee produces a signed contract for sale of the business to a buyer who is unsuitable – leaving the franchisor with little option, but to deny the franchisee the right to get out.

This is particularly painful for the franchisor where the selling franchisee is not much better than the buyer. Where an underperformer is trying to get out and no suitable buyers can be found, the best option could be for the franchisor to buy out the franchisee and start from scratch. Early pain will be followed by long-term gain.

Other franchisees will want to sell for all the right reasons. The best reason of all is the last of the above – namely, to maximise the selling price. This is a win-win for both the franchisor and franchisee.

Current trends

Franchisors typically pay little or no attention to when and how franchisees should sell their businesses. If, as we are told, ‘Generation Y’ types are going to have over 40 jobs in their career lifespan, expect today’s crop of new franchisees to hold onto their businesses for no longer than five years, on average. Note: the current average on business sales is seven years.

Today’s franchisees are smarter, learn quicker, and want new challenges sooner. They will try a number of systems, and will probably only stick with the one that offers good profit, lifestyle and capital gain.

Other trends in resales include:

· ‘Buy a job’ service franchises are being sold to migrant buyers or buyers with little English speaking experience;

· Larger franchise resales are attracting investor-type business buyers who are spending up to $2 million buying into strong brands;

· Many of the major franchises are developing second and third tiers to attract the buyer who wants to build a substantial business;

· Franchises that realise their businesses could disappear over the next ten years have been forced to reinvent their businesses –for example, bookstores, video stores, and single product food outlets; and

· More first-time buyers are turning to franchises because of the perceived safety of the systems and for the support offered by the franchisor.

Selling underperforming franchises

The greatest challenge for franchisors, franchisees and business brokers alike, is selling an underperforming franchise. If a franchise is performing below expectations, it can be for a number of reasons.

Selling ‘hot’ franchises

The other side of the problem is just as much concern for franchisors – that is, where their franchises are so popular that buyers are paying huge prices for the business. By huge prices, I mean the negotiated resale price represents a huge multiple of historical earnings.

Franchisees and franchisors can read the Franchise Council of Australia is a not for profit membership organisation that is the peak body representing the franchising sector in Australia.