Experts advise prospective franchisees to carefully review their franchise disclosure documents (FDD) before committing to the purchase of a franchise. Item 20 in the FDD discusses the sale of the franchise and the termination or transfer of the franchisor-franchisee contract. Sometimes these contracts include stipulations for franchisor consent the right of first refusal in a buy-back, and these rules can present hurdles if not planned for – or known about – in advance. Even so, experts say that there can be advantages to selling a franchise over an independent business, but vagaries in the market make it hard to plan for the benefit. For more on this continue reading the following article from Blue MauMau.
Individuals considering a franchise opportunity should include franchise resale performance as part of the due diligence process. Having an exit strategy is a critical component of any new business start-up.When individuals purchase a franchise some consider the possibility of selling it in the future or allowing their children to take ownership. For this reason, the resale potential of a franchise should be another item on the franchise evaluation checklist. However, it’s been my experience that the resale factor doesn’t receive the attention it deserves. In terms of franchise resale’s the current economic uncertainty in the U.S. serves as a reminder of how quickly things can change. A recent article in the Wall Street Journal entitled “The Economy Stole My Retirement by Sarah E. Needleman and Emily Maltby presents the challenges today’s small business owners face as they attempt to finally sell businesses they started many years ago. Since the U.S. economy is cyclical there are no guarantees that a post recovery recession will not occur in future years.
Despite the administrative hurdles a franchisee faces when selling their franchise, including franchisor consent and a first right of refusal, selling a franchises can provide advantages versus selling an independent business. These include a recognized brand, business model and operating system.
As part of the due diligence process, a prospective franchisee should gather information pertaining to franchise re-sales. As a resource, The Business Brokerage Press provides rules of thumb for franchise valuations. It’s a good way to gain an understanding of particular franchise re-sale values.
Here are some suggestions:
- Review Item 20 in the franchise disclosure document and look under Franchise Terminations and Franchises Reacquired by Franchisor. Ask the franchisor if any of the terminations were part of a franchisee resale. Also, if there is any franchisor acquisitions of existing franchisees were they positive transactions or did the franchisor pay a modest amount in order to save the location or avoid litigation?
- From the list of franchisees in the FDD contact those that were terminated and find out the reasons for termination.
- Ask the franchisor how many franchise resale transactions have taken place in the past 3 years.
- If you’re dealing with a new or small franchise system this information will be limited.
Individuals that are considering a franchise opportunity should include franchise re-sales as part of their due diligence checklist. Knowing the potential resale opportunity for a specific franchise is an important piece of information.
This article was republished with permission from Blue MauMau.