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Successful franchisors have a franchise resale program that helps franchisees understand their exit strategy options. These successful franchisors design an effective resale program and then educate franchisees on its availability and key features. Often, the resale program is communicated to franchisees as a policy.
Successful franchisees do not wait until the last minute to understand their franchisor’s franchise resale program. Instead, they are deliberate in planning in advance how they can utilize a resale program to achieve their desired outcome. Why? Few franchisees invest in franchised businesses to own those businesses for decades. Even if a franchisee does not believe they are ready to sell their business today, they must understand that a sale of the franchised business will be considered a transfer under the franchise agreement. It’s important to know the conditions the franchisee and any buyer must meet to get the franchisor’s consent to the transfer/sale of the business. To obtain consent and buyer approval, the seller must follow the process outlined by the franchisor.
Even if a franchisee plans to keep the franchised business in the family, passing it to family members, whether as a gift, sale, or through a trust, will be considered a transfer and subject to the franchise agreement’s transfer conditions.
There are key franchise transfer points a franchisee should consider in planning for the potential sale of their franchised business. Understanding the elements of the franchise resale program/policy increases the likelihood of a successful sale. Too often, franchisees wait too long to understand what it will take to get a successful outcome regarding the sale of their business.
Similarly, franchisors who fail to design an effective franchise resale policy often have franchisees frustrated with the resale process, resulting in suboptimal outcomes for the franchisee, potential buyer, and franchisor. Those outcomes are avoidable if the parties are aligned on the roles and responsibilities each has in the franchise resale process.
The franchise agreement will define the ownership change in the franchised business or franchisee entity that will constitute a transfer and be subject to the transfer conditions and process set forth in the franchise agreement. That includes any franchisor right of first refusal. The transfer conditions and process can be complicated. Each franchisee should review the transfer provisions in their franchise agreement now. Any transfer not complying with the transfer conditions typically is an event of default under the franchise agreement without any opportunity to cure.
If a franchisee is potentially interested in selling their business, the initial step is to prepare the business for sale. That preparation must include collecting and organizing data and information about the franchised business that a potential buyer will want to review and evaluate. That can include updated and accurate unit-level financial information, tax returns, any lease/sublease, marketing data, key contracts, and customer and employee information.
Also, determine when and how you want to engage advisors in this process. Selling your franchised business can be an emotionally charged time. The more prepared and organized you are, the more interest and confidence you will instill in a potential buyer.
During any potential sale process, stay keenly focused on the ongoing operation of the business. Do not take your eye off that ball. Being well prepared and understanding the steps required to transfer ownership of your franchised business smoothly will help maximize your likelihood of achieving your desired outcome.
Franchisors with successful resale programs provide the following as part of the transfer policy:
A transfer to family is still a transfer, and the franchise agreement’s conditions still apply, including franchisor consent. (See point above regarding termination of the franchise agreement for an unauthorized transfer.) Any family member taking ownership of the business must meet the franchisor’s qualifications, really want the role and responsibility, and be fully aligned on what will be required of them to take the business to the next level. Not getting this right can potentially disrupt family harmony.
Finally, if you are planning to use a trust or will as an estate-planning vehicle, consult with an estate-planning lawyer/other advisors and your franchisor early and often to understand the franchisor’s view on those plans.
Brian Schnell is the chair of Faegre Drinker’s franchise practice. He is passionate about franchising and has more than 35 years of experience in finding opportunities and solutions for clients. He is also the chair of IFA’s Franchise Relations Committee.