Common Franchise Resale Mistakes to Avoid

Franchise owners have work to do before putting a business up for sale. That includes knowing what the franchisor will require for a transfer and making sure the records a buyer will want to see are ready for review.

Ari Stern, a partner at Fox Rothschild LLP, identified three common franchise resale mistakes: failing to involve the franchisor early, overvaluing the business and having poor documentation.

Common Franchise Resale Mistakes

1. Waiting Too Long To Involve the Franchisor

One of the biggest franchise resale mistakes is waiting until a potential buyer has been identified before talking to the franchisor. Stern said approval of a transfer is often an explicit requirement of the franchise agreement, and the brand will need time to determine whether the prospective buyer meets its standards.

Starting the conversation earlier may do more than prevent delays.

“Franchisors may also have one or more leads — people who are looking to buy into the system — and may be able to start a dialogue between a prospect and a franchisee looking to sell,” Stern said.

2. Setting the Asking Price Too High

Owners understandably want to get the best possible price for a business they have built. But the asking price still needs to reflect the performance and value of the franchise.

“A second common mistake is overvaluing the unit or units,” Stern said. “Unfortunately, there are instances in which a franchisee, wanting to obtain as much money as possible from the sale, sets a price and tries to justify it when that number is unfounded.”

An inflated price could make the business harder to sell. It could also create conflict after the transaction if the buyer finds that the business does not perform at a level that supports the purchase price. A business broker who understands the industry may help determine a reasonable valuation and recommend changes that could improve the business before it goes on the market.

3. Going to Market With Poor Documentation

Poor recordkeeping is another common franchise resale mistake. Buyers will review the business closely during due diligence, and disorganized or incomplete records may raise questions about the information the seller has provided.

“Messy documentation can stifle or impede a sale because the prospective buyer will review it during due diligence, question whether the affairs of the business are in order and wonder whether the buyer can rely on what is being represented,” Stern said.

Financial records, contracts and other important business documents should be organized before the sale process begins. Sellers should also review the transfer requirements in their franchise agreement so they understand what the franchisor requires. Stern recommends working with professionals who regularly handle franchise resales, including a franchise attorney, accountant and business broker.

Planning for the Transition

Preparing for a resale also means considering how the ownership change will affect employees and day-to-day operations.

“You want the transition to be smooth,” Stern said. “There may also be operational issues related to employees, including making sure they understand the situation and are given notice of the sale.”

The incoming owner will need to be ready to take over the business as well. Involving the franchisor early gives the seller, buyer and brand more time to work through the approval process and address operational issues before the ownership change.

Key Takeaways for Franchise Sellers

Involve the franchisor early. Review the franchise agreement and begin the conversation with the franchisor before a buyer is at the table. Starting early gives the brand time to explain its transfer requirements and begin the approval process.
Support the asking price. Make sure the price reflects the performance and value of the business. An experienced business broker can help determine a reasonable valuation before the franchise goes on the market.
Prepare for due diligence. Organize financial records, contracts and other documentation before beginning the sale process. Sellers can also bring in a franchise attorney, accountant or business broker to help prepare for the transaction.

For Stern, preparation is ultimately what separates a difficult resale from a smoother one. “If you have the pieces in place and all these players on your team, you should be able to achieve a higher price with a much smoother transition,” he said.

For more on franchise resales, check out these articles on 1851 Franchise:

What Are Common Franchise Resale Mistakes I Should Avoid?