If you own a franchise, your franchisor will play a vital role in the process. In such cases, we recommend that you contact your franchisor as early as possible in the process to gain their cooperation.
Here are some tips when dealing with your franchisor:
Assistance: Contact your franchisor as early as possible in the process to determine what role they will play and what assistance they provide in selling your business. Some franchisors provide extensive support, while others play a limited role.
Process: Ask your franchisor for a written description of the process for transferring your franchise. Some franchisors ask buyers to attend “discovery day,” while others don’t. Some franchisors require that the buyer complete the training before the closing, and others don’t. Obtain a written description of the process to be sure.
Buyer qualifications: Secure a list of specific financial and experience requirements from your franchisor that a new buyer should have.
Franchise agreement: Contact your franchisor to verify that the terms of your franchise agreement and the size of your territory will remain the same after the sale. Take the assumptive route: “I want to verify that everything will remain the same when I transfer my franchise to a new buyer.” If there is a change in terms, whether it be the size of your territory or the amount of your royalties, find out before you put your business on the market so you can present these new terms to buyers. Ask if your franchisor will require a buyer to sign a new franchise agreement or if your existing agreement will be assigned. If it’s assigned, ensure you are released as a guarantor on the agreement after the transfer.
Training: Ask your franchisor what training is offered to new franchisees, the amount of the training fee, and who foots the bill.
Transfer fee: Contact your franchisor to determine the amount of the transfer fee and who pays it.
SBA Franchise Directory: Check if your franchise is listed in the SBA Franchise Directory. If it’s not listed, a buyer will not be able to obtain an SBA loan to finance your business and will have to obtain a conventional loan. This will make the sale of your business significantly more difficult to finance. If your franchise is listed with the SBA, a buyer may be able to obtain an SBA loan to finance the purchase of your business. However, your business must also be pre-qualified for an SBA loan.
Franchise Disclosure Document (FDD): Obtain a current FDD for your franchise and read items 19 and 20 (sections) of the FDD.
- Item 19: Item 19 is a financial disclosure and, if promising, it can be used as a marketing piece when selling your business.
- Item 20: Item 20 lists the number of transfers that have occurred in the franchise system over the previous years. A low churn rate is indicative of a healthy franchise concept. Item 20 can also be used as a marketing piece when selling your business.