Why franchise resales can be so problematic

By Jason Gehrke | 15 Jul 2019 View comments

 

Franchise resales can be problematic in most franchise networks for two reasons:

  1. Franchisees are not experienced in selling their businesses, and have no idea what’s involved (or how long the process will take).
  2. Franchisors are generally focused on recruiting franchisees for new outlets, and often do not have the resources to support the resale of existing franchisees.

Let’s drill into this a bit further.

Franchisee inexperience & expectations in selling their business

For most franchisees, their franchise is the first business they will have operated in their life. They’ve never bought or sold a business before. When they eventually do decide to sell their business, they have no understanding of the complexity of the process, the length of time it will take, the role of the franchisor in approving a buyer, and a realistic price expectation.

Most franchise agreements will require the franchisee to inform the franchisor in writing of their intention to sell. Often this results in an expectation that the franchisor will magically produce a buyer out of thin air in a matter of days, and moreover, a buyer prepared to pay a sky-high price for the business.

The reality is that selling a business is a complicated and time-consuming process. 

Like selling a house, the franchisee has to prepare the business for sale by improving its physical and financial presentation, keep it operating in good order, be realistic in their pricing, and acknowledge that the whole process takes time.

Too often, franchisees set their sale price too high, their sales timeframe too short, and do little or nothing to improve the physical and financial presentation of their business, then blame their franchisor if the business doesn’t sell. (When a potential buyer with enough money does come along, the franchisee will “forget” that the buyer also has to meet the franchisor’s current selection criteria, and expect the sale to go through without the buyer being assessed in the same manner that the franchisee themselves were assessed by the franchisor before joining the network in the first place).

So if we recognise that these can be problems from the franchisee’s side of the sale process, what can the franchisor do to address them?

Franchisor resources to support resales

Although franchisors prefer to recruit new franchisees to grow their network, it is important to recognise that a resale of an existing business can also benefit the network by replacing an outgoing franchisee with potentially one who will take the business to an even higher level of performance. 

While it is a lot of work for a franchisor to facilitate a resale – especially as the network doesn’t actually increase its number of outlets but simply replaces one operator with another – the result can still be an overall improvement for the brand (through potentially higher sales, and consequently, royalties), and its customers (through improved service).

Top tips for a solution to franchise resales

Franchisors can increase their support of the resales process and better manage the expectations of outgoing franchisees by:

  • Including training about the resales process and exit planning in the initial induction training undertaken by all new franchisees, so they are aware that a process exists when the time comes to sell;
  • Create a section in their operations manual dealing with franchise resales, and outlining the steps involved;
  • Compile and aggregate data on past sales in the network to understand (and share with outgoing franchisees), the average length of time past businesses have taken to sell, and the average sale price achieved;
  • Consider creating a preferred supplier relationship with one or two approved business brokers who know and understand the business, and who are available to assist any franchisee who puts their business up for sale (rather than franchisees finding their own independent brokers, who may know little or nothing about how the business operates);
  • Developing a template Information Memorandum (possibly in consultation with the preferred business brokers) for franchisees to use in the resales process;
  • Highlighting the current selection criteria to outgoing franchisees so that they don’t expect to sell their businesses to people who will not meet these criteria;
  • Include a list of existing franchises for sale on the franchisor’s recruitment web page;
  • Boost their support and supervision of the outgoing franchisee’s business to ensure that it is both physically well-presented (ie. the store is neat and tidy, well-stocked, and using good-condition equipment, etc) and financially well-presented (ie. that the franchisee has their profit & loss statements up to date, and have removed personal expenses often charged to the business for tax purposes.

By managing expectations more effectively, and providing additional support for franchisees before and during the resales process, franchisors can make resales less problematic for themselves, and better-assist franchisees to achieve realistic outcomes.

The Franchise Advisory Centre regularly conducts education workshops and internal training for franchisors on the topic of Managing Franchise Resales.