How Do I Prepare a Franchise for Resale? What Franchisees Should Know

Franchise owners who expect to sell their business should give themselves time to get it ready for a buyer. Cleaning up the financials, reducing the owner’s role in daily operations and understanding the franchisor’s transfer requirements can all make a difference once the business goes on the market.

JT Tatem, president of Transworld Business Advisors, recommends beginning that work 12 to 24 months before a planned sale. While franchise owners already have some advantages, including established operating procedures, they still need to make sure the individual business is ready for scrutiny.

“Make sure your financials have been adjusted to remove any personal expenses or non-essential business expenses,” Tatem said. “Complete as much of that as far in advance as possible so the financials you present to a buyer are clean. The cleaner, the better.”

What Should Franchise Owners Do Before a Resale?

Owners preparing a franchise for resale should start with the financial records buyers will eventually review. Personal expenses and other costs that are not necessary to operate the business should be clearly identified so buyers have an accurate picture of its performance.

The operation should also be able to function without the franchisee handling every important task. Responsibilities can be delegated to managers and employees who will remain with the business after the sale.

“If the business is squarely resting on the shoulders of the franchisee, a buyer will think, ‘When the owner leaves, part of the business leaves with them,’” Tatem said. “You never want to be in that position.”

Documented processes help make that transition easier. Franchise systems typically provide standard operating procedures, but owners should make sure the processes used at their individual location are clear and that employees understand their responsibilities.

“That’s what a buyer is purchasing: a machine that’s already producing cash flow,” Tatem said. “Any interruption to that machine decreases value.”

How Franchise Owners Should Clean Up Their Financials

Owners should also take a close look at the balance sheet before going to market. Tatem recommends collecting outstanding accounts receivable, particularly older balances that may become more difficult to collect. Owners can also reduce accounts payable, pay down lines of credit and address outstanding debt. Most business sales are structured on a cash-free, debt-free basis. The seller generally keeps the company’s cash while remaining responsible for its existing debt.

Owners should also have a normalized profit and loss statement available. A seller’s discretionary earnings (SDE) calculation can help show the financial benefit the business provides to an owner after adjustments for certain expenses and owner compensation.

What Buyers Look for in a Franchise Resale

A prospective buyer will evaluate the individual business along with the franchise system it belongs to. That means buyers may look at the franchisor’s overall health and consider what their own relationship with the brand would look like in addition to reviewing the location’s financial performance.

“When you buy a franchise, you get all those things — plus a partner,” Tatem said. “And that partner may be someone you’re paying 5%, 6%, 8% or more of your revenues to.”

Buyers can also compare a location’s results with other businesses in the franchise system. Depending on the information available, that may include average unit volume, revenue growth, cost of goods sold, labor costs and overhead.

Owners preparing a franchise for resale should be ready to provide clean financial statements, a normalized P&L and an SDE calculation so prospective buyers can understand how the business has performed.

“If your business has strong revenue, solid profit margins, low overhead and controlled cost of goods, you’re going to attract buyers and command a good multiple,” Tatem said.

What Role Does the Franchisor Play in a Resale?

The franchisor has a direct role in the transfer because it generally must approve the new franchisee. Franchisors may have financial qualifications, industry experience requirements or geographic restrictions for incoming owners. The buyer may also have to complete the brand’s training program before taking over the location.

“The franchisor holds what I’d call the last stamp of approval,” Tatem said. “The buyer and seller may be fully aligned and ready to move forward, but the buyer still must be approved by the franchisor.”

Tatem recommends reviewing the Franchise Disclosure Document and franchise agreement before listing the business. Those documents outline the transfer requirements that can affect the transaction.

Transfer fees should also be addressed early. Tatem said most franchisors charge a fee when ownership changes, often at a discount to the initial franchise fee. Knowing that amount in advance allows the seller to account for it when structuring the deal and avoid what Tatem described as “deal-breakers surfacing at the last minute.”

Getting a Franchise Ready for Resale

Franchise owners planning a future sale can start with three areas:

• Clean up the financials. Maintain accurate records, collect outstanding receivables, address debt and prepare a normalized P&L and SDE calculation.
• Reduce owner dependence. Give managers and employees defined responsibilities and make sure the business can continue operating when the owner leaves.
• Review the transfer requirements early. Check the FDD and franchise agreement for buyer qualifications, approval procedures and transfer fees before putting the business on the market.

Owners who prepare a franchise for resale well ahead of time have an opportunity to address issues before a buyer begins due diligence. Strong financial performance, organized records and a business that can continue operating through an ownership change can make the sale process easier for everyone involved.

For more information on franchise resale, check out these related stories on 1851 Franchise:

• Can I Sell My Franchise Later? A Guide for Prospective Franchisees
• Is Buying an Existing Business a Good Idea? Pros and Cons of Franchises for Sale
• The Hidden Costs of Franchises for Sale You Need to Know About