The Year of the Resale: Shifting Focus to Keep Borderline Units Open in Hard Times

There's a saying I've heard in business and the franchise community for years: "Either your system is growing, or you are slowly going out of business and just don't know it yet."

These days, everyone's singing the "Bad Economy Blues." Unfortunately, this sentiment can become contagious within franchise systems. So what can franchisors do to help their franchisees sustain and grow, and to maintain happy franchise systems in these difficult times? Or at least, what can franchisors do to circle the wagons and avoid franchisee attrition? Attrition is a franchisor's worst enemy as failed and/or closed units reduce royalty income, render some support staff obsolete, and wreak havoc with franchisee validation.

I think we are all aware of the pressure put on franchise sales departments each year to add units so we can maintain or surpass the prior year's unit count. In today's marketplace this becomes more and more difficult because of financing challenges for candidates; uncertainty about the economy and direction of the country; and lackluster validation from current owners in the system, who are fighting through tough times and often changing the way they do business.

I would suggest that this is the year to concentrate on "resales." Don't lose franchisees who would have sold their existing unit instead of closing it... if only someone had assisted them in making that tough decision.

No franchisor wants to lose a franchise unit to termination or closure. Wouldn't it be better to help the franchisee find a buyer for the business?

However, most franchisors have no formal resale program in place to assist franchisees in selling their business. The result is that too many close when they could have been saved with new blood and the enthusiasm of a proud new owner. If we can't be adding a lot of new units this year, then what better time to focus on system sustainability by enabling sales of existing units?

A franchisor must be willing to be proactive in working with the support and operations staff to identify potential resale opportunities. Which franchisees are struggling financially, tired of the business, or are resolved that this just didn't end up being a good fit? If the operations staff identifies these franchisees, they can work hand in hand with the franchise development department to place a qualified candidate into an operating unit. What this means to the system is this:

  • You don't lose a unit.
  • In most cases new owners increase existing sales by a minimum of 50 percent.
  • Existing businesses are easier to finance because of their track record and the possibility of owner financing.
  • Generally, you eliminate a bad validator.
  • Instant results and stimulated royalties because there is no startup timeline.

The question of if and how a franchisor should be involved in the resale process has been an ongoing topic of discussion for years. Companies have been advised to stay away; to let the owners figure it out on their own; that there is too much liability in helping out; and to simply let them close. As a franchisor, your liability started with accepting the candidate into the system.

In today's economy, franchisee validation is much different than when the economy was in an upswing. Having a proactive resale program can make a big difference in keeping your royalty flow going, and in getting a more positive validation when new candidates call existing owners to see if the franchisor works with them to keep their business solid.

If you don't currently conduct franchisee financial reviews, it will be very difficult for you to head off potential financial failure until it's too late. Trends develop months before you receive that call from the franchisee that they just can't go on anymore. At that point, you really have only three choices in assisting franchisees to sell their business: 1) do it internally; 2) set up a national referral to a third-party vendor; and 3) do nothing.

Franchisees left to their own resources without direction will get frustrated. They will talk with local brokers who don't understand the value of a franchise and brand name and discourage them from selling. They will most likely tell them that what they have is worth nothing. Generally the franchisor is their next call, saying "How can this be?"

We've all dealt with resales in some shape or form in the past and understand the complexity of this process. But if we don't get involved on the franchisee level we could all face declining Item 20 numbers that will make it even more difficult to offer and sell franchises in the future. Don't wait for that phone call from a broker network or your internal team that says: "I just lost another great candidate to a franchisee offering their franchise to them. I didn't even know they were for sale. Did you?"

It might be time to sit down with your operations and franchise development teams to discuss how everyone can work together to assist franchisees in finding a buyer for their business. This will help the attitude of existing franchisees, keep your system from slipping backward, and establish a listing agreement and commission structure so broker networks or your internal sales team can be paid on resales.

It is time to step up to the plate and help your existing franchisees get qualified buyers and to get your franchise development department as excited about selling an existing business as a new unit. That simply means make sure they are compensated fairly and equally to get the job done.

With the proper system in place selling existing businesses can be profitable, fun, and just the right thing to do for everyone. Happy Reselling!

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