Growing a Franchise
Franchise owners preparing to sell their businesses should understand how broker fees are structured and why the terms of their franchise agreements can affect the final sale price.
Business broker fees are one of the costs franchise owners need to consider when selling their business. How much they pay depends on the broker and the terms of the transaction. There's also the franchisor's transfer fee to consider, which can reduce the amount the seller walks away with.
When a business broker handles a franchise resale, their fee may be based on a percentage of the final sale price, with a minimum charge in some cases. Sellers generally pay the commission at closing, though that's not always how it works. Before hiring a broker, owners should get a written explanation of what they'll owe and when payment is due.
Jason Ronnel, founder and president of franchise consulting firm Ronnel Enterprises, describes a different arrangement in which a broker or consultant receives compensation from the franchisor rather than the franchisee. He said owners should also be prepared for a separate charge associated with transferring ownership.
"Franchise owners should budget for a 'transfer fee' charged by the franchisor," Ronnel said. "This varies widely across different brands but will be a four- or five-figure charge. If a broker is involved in the transaction, the franchisor is typically expected to pay that fee (usually, no money is exchanged between the broker and franchisee)."
There's an important difference between a consultant who's paid by the franchisor and a business broker working on behalf of the seller. Franchise owners should know which arrangement they're dealing with so they understand who's responsible for the fee.
When considering what fees business brokers charge, franchise owners should distinguish between the broker's compensation and the franchisor's transfer fee. A broker's commission and other terms may be negotiable, depending on the agreement. Franchise transfer fees, however, are generally established in the franchise agreement.
Ronnel said the transfer fee is not typically negotiable because the franchise agreement usually spells out the requirements. He added that, in the franchisor-paid arrangements he described, the broker's compensation is generally predetermined.
There is another cost consideration that sellers might overlook: the terms under which the buyer will operate the franchise. If the buyer must sign the franchisor's latest agreement, changes to ongoing fees could affect the business's appeal and market value.
"In addition to the transfer fee, the seller should check for any changes in the latest version of the franchise agreement that the buyer would be required to sign," Ronnel said. "If there are changes in royalties, ad fees or other required expenses, this can affect the market value of the business."
A buyer who would have to pay higher royalties might see the business differently than one who could keep the seller's existing terms. Franchise owners should look into those requirements ahead of time so they know what to expect when negotiations begin.
The cost of hiring a broker should be considered alongside the work being performed. Ronnel said franchise consultants can provide pricing guidance, vet potential buyers, post online listings and coordinate transactions. They may also help sellers identify another business opportunity that better fits their goals.
A traditional resale broker may provide similar services, but owners should confirm exactly what is included in the engagement agreement. That means understanding whether the broker will handle buyer screening and negotiations, what marketing expenses are covered and whether any additional charges apply.
The agreement should also explain when compensation becomes due and whether the seller will owe anything if the business does not sell.
For franchise owners asking what fees business brokers charge, the best starting point is to identify every party involved in the sale and understand how each is compensated.
Knowing what fees business brokers charge is only part of preparing for a franchise resale. Owners should also understand how the franchise agreement affects the transaction so they can evaluate the likely costs before putting their business on the market.
For more information on the costs and requirements of selling a franchise, check out these related articles on 1851 Franchise:
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