Growing a Franchise
Franchise owners can look within their existing system or reach a broader pool of buyers, but preparation and franchisor approval can determine whether a potential deal reaches the closing table.
Franchise owners looking for a buyer may need to expand their search beyond the people they already know within their system. Other franchisees may be interested in expanding, while the franchisor or an M&A advisor can provide access to additional prospects.
David Stiles, managing director and co-lead of the M&A Advisory department at Citizens Bank, said owners often know neighboring franchisees who could be potential buyers. That can be a logical place to start, although limiting the search to those operators could mean overlooking other opportunities.
“The universe of buyers is vast and constantly growing,” Stiles said. “Having awareness of potential successors to your business is not always obvious.”
Existing franchisees can be a natural source of potential buyers because they already know the brand and its operating model. An operator in a nearby market may also see an acquisition as an opportunity to add locations to an existing portfolio.
The franchisor may have prospective franchisees who could be interested in buying an existing location rather than opening a new one. Stiles cautioned that those lists may include older leads or prospects who are no longer serious about buying. M&A advisors can provide another avenue for finding a buyer by reaching beyond the franchise system.
“Sometimes the franchisor might have leads that can be introduced to sellers,” Stiles said. “However, M&A advisors have the best pulse on a much wider array of interested parties that could be considered.”
Even when a seller finds a buyer independently, the franchisor generally has to approve the transfer. Prospective buyers should meet the franchise system’s minimum qualifications before negotiations move too far. Those requirements may include financial qualifications, operating experience or other standards established by the franchisor and outlined in the franchise agreement.
The franchisor may also require the location to meet certain operational or facility standards before approving the sale. Deferred maintenance, equipment issues or other improvements could become conditions of the transfer and add costs to the transaction.
“Regardless of where the buyer comes from, the franchisor ultimately has approval authority and must consent to the transfer,” Stiles said. “These requirements can significantly impact the economics of a deal and may not surface until after a purchase agreement has been signed.”
Owners looking to find a buyer for their franchise should review potential transfer requirements early so they know what may need to be addressed before closing.
A buyer will consider the financial performance of the franchise along with the condition of the overall operation. Geography, unit economics, recent performance, lease terms and the condition of the assets can all factor into a buyer’s evaluation. Buyers may also look at the strength of the management team and how the location performs compared with others in the franchise system.
Stiles compares the preparation process to getting a house ready to sell.
“You would make repairs, improve curb appeal and address any dated features before listing,” he said. “Sellers should take the same approach with their business, addressing weak spots and presenting the company in the best possible light to drive a stronger outcome.”
Addressing those issues before the business goes on the market can also prevent them from becoming sticking points later in the transaction.
Some owners find a prospective buyer on their own and try to handle the sale directly. That route can work, but it can also leave the owner managing a process they may have little experience with. Stiles said he has spoken with owners who spent significant time negotiating with an interested buyer only to see the transaction fall apart.
“A direct, proprietary transaction can absolutely get done, but more often than not, engaging a professional advisor to prepare and position the business for sale leads to the best outcome,” he said.
An advisor can help an owner prepare the business for sale, identify potential buyers and manage the transaction as it moves through negotiations and due diligence. That broader reach can also be important for owners trying to find a qualified buyer for their franchise rather than simply an interested one.
Stiles points to preparation as one of the biggest factors in getting a transaction completed. Running a successful franchise and selling one require different skills. An owner may have years of experience managing employees, serving customers and overseeing the finances of the business without having gone through an M&A transaction before.
“Preparation is the single biggest driver of a successful sale,” Stiles said. “A burger franchise owner may excel at operating restaurants and managing staff, but selling a business is a completely different discipline.”
Franchisor requirements, facility improvements, buyer qualifications and other issues can slow a transaction if they are discovered late. Identifying those potential obstacles before the search begins can help owners avoid spending months pursuing a deal that cannot close.
Franchise owners preparing for a sale can focus on three areas:
Finding a buyer for a franchise is only part of the sale process. Owners also need a buyer who meets the franchisor’s standards, understands the business and has the ability to complete the transaction.
For more info on selling an existing franchise business, check out these related stories on 1851 Franchise:
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