When a franchisor has an opportunity to sell its company it needs to be properly prepared for the due diligence process. There are a number of steps that franchisor’s can take to prepare for a possible sale to avoid any problems from arising.

Franchisors have a number of reasons for selling: ranging from the opportunity to earn a significant return on the transaction to  personal reasons. Whatever the reason, selling a franchise company can present added challenges compared to selling a non-franchised business. Although a franchise company presents the potential buyer a network of franchisees, this perceived advantage can easily become a disadvantage. There is no doubt that a potential buyer, which will acquire franchise agreements and the franchisor obligations will conduct a vigorous due diligence.

In addition to the routine steps companies take when preparing to sell their business, a franchisor needs to exceed these steps. Many of the items that can impact a potential sale can’t be corrected in a short period of time but rather might take months to resolve. The key word is: Preparation

An existing franchisor, considering the sale of their company,  should consider the following items:

• The easiest way to scare off a potential buyer is to have a group of disgruntled franchisees. Take the necessary steps to identify and correct franchise relations problems before listing the business for sale.
• Address any outstanding franchise disputes before they escalate. The last thing a buyer wants to inherit is a franchisor with a number of franchisees with unresolved problems, be they financial or territorial in nature.
• Be sure that all franchise files, including agreements and documentation, are complete and in good order. A potential buyer does not want to deal with incomplete or disorganized files. They may even look for a reduced purchase price.
• All open litigation should be resolved where possible. Obviously timing is key; however, if there is a strategy to sell within the year then cleaning up open litigation should be done.
• Have financial statistics pertaining to franchise operations. Although franchisor income statements and the balance sheet are key documents, most buyers want to see metrics regarding franchise sales, gross margins, sales trends, etc. If you don't have a vehicle for gathering this information, be sure to implement a system, ASAP.
• Review franchise agreements for expiration dates. A buyer might prefer to have less franchisees and operate more units as company locations. Some may prefer to have franchisees locked in for longer terms. Whatever the situation, it’s better to be in control of this situation. Franchise agreements with a short term present an opportunity to encourage extensions for good performers and an exit strategy for those franchisees who may be struggling.

Although comprehensive due diligence will be conducted by potential buyers, the scope of due diligence will increase based upon the size of the transaction. There are other items to consider, however, the preceding are among the more important. The purchase price of a franchise company is based in great part upon the value of the franchise network. That franchise network and its franchisees, which operate under franchise agreements, can be expected to undergo a good deal of scrutiny. As a final point, buyers should be considered in terms of being compatible with the franchise network in order to avoid any possible conflicts.

About the author: Ed Teixeira has over 35 years of franchise industry experience as a franchise executive and franchisee. He has served as a franchise executive in the c-store, manufacturing and home healthcare industries and has licensed franchises in Asia, Europe and South America. Ed operates FranchiseKnowHow  which provides information and advice to prospective and existing franchisees and franchisors. He publishes newsletters for the franchise community.