How to move on: selling your franchise

By Sarah Stowe | 28 Sep 2016 View comments

What you need to consider before you sell your franchise business.

Most franchise agreements have restrictions on sale of the franchise. These include obtaining consent of the franchisor. Franchises which run from specific locations also have landlord’s restrictions on assigning the lease. There is a lot for you to consider before listing your business for sale, including the following:

Franchise agreement

You must check your franchise agreement for the procedure and requirements for selling your business. These may include a right of first refusal in favour of the franchisor, which you must comply with. There is also a likelihood of a transfer /sale fee payable to the franchisor from the purchase price, which can be expressed either as a percentage of the purchase price or as a fixed amount.

If the franchise agreement is silent on the issue of sale you can still ask the franchisor to agree to the transfer although the franchisor’s consent is not required.

You should review all the requirements and preconditions to the transfer contained in the franchise agreement to understand what is required from you. Among other things, the purchaser will be required to satisfy the franchisor that they are business and financially savvy. The purchaser will also need to successfully complete training.

You must also understand how much time is left in relation to the term of the franchise agreement and whether there are any options to renew it. The longer the total time span of the franchise agreement, the more valuable your business is.

Lease

If your franchised business is tied to a location, you need to review the documents allowing you to occupy your premises. Some franchisors hold the leases in their name and grant each franchisee licence to occupy the relevant location. If this is the case, the franchisor will either assign the licence agreement or draft up a new one for the purchaser, once the buyer is approved.

However, if you are the tenant named in the lease, you must satisfy the landlord’s requirements for the transfer contained in the lease and obtain the landlord’s consent. This may and often does include paying landlord’s solicitor and agent costs.

Engage an accountant

In order to sell your business, your accountant will need to prepare relevant financial information to be provided to the potential buyer. 

The financial information must be accurate and disclose all assets and liabilities of the business. An accountant will also be able to assist you with determining the sale price, taking into account its value and all the expenses that will be incurred. 

You also need to check the requirements in your State legislation as to whether your franchise is considered a small business, in which case an extra form with financial information needs to be completed by your accountant.

Engage a business broker

You have a higher chance of selling your franchised business fast with the assistance of a good business broker. Choose a broker who has experience in selling franchised businesses and, if possible, one that has successfully sold other franchises within your group.

Engage a franchised lawyer

Selling any business would require an assistance of a lawyer. Selling a franchise requires a lawyer familiar with the franchise industry and dealing with franchisors. A franchised lawyer will be able to:

  1. review your current franchise agreement
  2. review the lease, if applicable
  3. draft the contract of sale
  4. deal with the landlord and the transfer of the lease
  5. liaise with the franchisor to ensure smooth transition.

Costs of selling

You must consider the costs of selling your franchise and account for it when setting the price. The costs to you will include:

  • business broker’s fees
  • accounting fees
  • legal fees
  • transfer costs under the franchise agreement payable to the franchisor
  • landlord’s costs, which are payable by you unless you agree with the buyer that they will pay
  • capital gains tax if you sell your business for a higher value than its cost price

Before selling your business, get all your ducks in a row and do your homework. See the relevant advisers so that you enter this process being educated as to the consequences and outcomes.