Growing a Franchise
Edible Brands executive Matthew Walls explains what franchisors look for in prospective buyers, why approval can be denied and how sellers can avoid complications during a transfer.
Selling your franchise may seem straightforward once you've found an interested buyer, but there's another party that typically needs to sign off on the deal: the franchisor. Do franchisors need to approve my buyer? In most cases, yes, and waiting too long to involve the brand can create problems that put the entire sale at risk.
A franchise sale involves more than transferring ownership of a business. The buyer will also be taking responsibility for a location that operates under an established brand, and the franchisor has an interest in making sure that person is qualified to represent it.
Matthew Walls, president and chief stores officer at Edible Brands, said the approval process helps protect the entire franchise network. At Edible Arrangements, for example, a disappointing customer experience can affect both the person purchasing a gift and the person receiving it. If those experiences become a pattern, the damage can extend well beyond the individual store.
"In franchising, the brand is a party to the transaction. The franchisor's stake in who takes over a location is just as real as the buyer's or the seller's," Walls said. "When a store transfers to a new owner, the franchisor is accountable to the entire network. You are making a decision that affects every other franchisee operating under that brand and system."
That responsibility makes buyer approval an important part of protecting the brand's reputation and the value other franchisees have worked to build.
Having enough money to purchase a franchise is important, but financial qualifications alone won't necessarily earn a buyer approval.
Walls said he wants to see candidates who understand the business they're purchasing and are prepared to take an active role in its success. That means learning about the brand's operations, reviewing the Franchise Disclosure Document (FDD) and speaking with existing franchisees about their experiences.
"The first thing I look for is whether someone has the energy, the capital and the desire to actually build the brand in a market. There is a meaningful difference between simply owning a store and buying into the brand's mission, and it shows up in the conversation pretty quickly," Walls said. "Capital matters, but it isn't the whole picture. Someone can be adequately capitalized and still be the wrong fit."
Buyers should be able to discuss the location's financial performance and explain how they plan to make a profit. Simply assuming customers will come because of the brand's name isn't likely to impress the franchisor.
When franchise owners ask, "Do franchisors need to approve my buyer?" it's also worth understanding what might cause a franchisor to say no.
According to Walls, poor fit is one of the biggest concerns. Buyers who want to operate independently of the brand's established standards can create problems even if they have strong financial credentials.
Insufficient working capital is another issue. Buyers need enough financial flexibility to manage the business during their first year without making decisions that could hurt the operation.
The asking price can also complicate approval. Walls said longtime franchise owners sometimes base their valuation on the years they've invested in the business rather than its actual financial performance. If the purchase price leaves a buyer unable to meet the franchisor's financial requirements, the deal may fall apart.
These problems are easier to address before both parties have invested considerable time in negotiations.
One of the most important things sellers can do is contact their franchisor early. Waiting until a deal is nearly complete can lead to unwelcome surprises involving transfer requirements, the remaining term of the franchise agreement or the condition of the location.
Sellers should also be prepared to share accurate financial information. That includes identifying unusual expenses, explaining how their compensation is accounted for and disclosing any franchisor incentives that might not transfer to the buyer.
The buyer has homework to do as well. Walls emphasized that reviewing the FDD and understanding the economics of the business should be priorities well before the approval meeting.
"The FDD is where I would start. A buyer who has genuinely worked through that document (not just had their attorney look at it), who understands the unit economics, and can speak to how they plan to run the business is going to move through the approval process much more efficiently," Walls said.
If you're wondering, "Do franchisors need to approve my buyer?" start by reviewing your franchise agreement and talking with your franchisor about what the transfer process requires.
Three steps can help keep the sale on track:
The sooner everyone understands what's required, the easier it becomes to work through potential problems before they threaten the sale.
For more information on preparing your franchise for resale, check out these related articles on 1851 Franchise:
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