Franchise Re-Sales: a Key Consideration When Evaluating a Franchise

Individuals considering a franchise opportunity should include franchise resale performance as part of the due diligence process.  Having an exit strategy is a critical component of any new business start-up.When individuals purchase a franchise some consider the possibility of selling it in the future or allowing their children to take ownership. For this reason, the resale potential of a franchise should be another item on the franchise evaluation checklist. However, it’s been my experience that the resale factor doesn’t receive the attention it deserves. In terms of franchise resale’s the current economic uncertainty in the U.S. serves as a reminder of how quickly things can change. A recent article in the Wall Street Journal entitled “The Economy Stole My Retirement by Sarah E. Needleman and Emily Maltby presents the challenges today’s small business owners face as they attempt to finally sell businesses they started many years ago. Since the U.S. economy is cyclical there are no guarantees that a post recovery recession will not occur in future years.

Despite the administrative hurdles a franchisee faces when selling their franchise, including franchisor consent and a first right of refusal, selling a franchises can provide advantages versus selling an independent business. These include a recognized brand, business model and operating system.

As part of the due diligence process, a prospective franchisee should gather information pertaining to franchise re-sales.  As a resource, The Business Brokerage Press provides rules of thumb for franchise valuations.  It’s a good way to gain an understanding of particular franchise  re-sale values.

Here are some suggestions:

  • Review Item 20 in the franchise disclosure document and look under Franchise Terminations and Franchises Reacquired by Franchisor. Ask the franchisor if any of the terminations were part of a franchisee resale. Also, if there is any franchisor acquisitions of existing franchisees were they positive transactions or did the franchisor pay a modest amount in order to save the location or avoid litigation?
  • From the list of franchisees in the FDD contact those that were terminated and find out the reasons for termination.
  • Ask the franchisor how many franchise resale transactions have taken place in the past 3 years.
  • If you’re dealing with a new or small franchise system this information will be limited.

Individuals that are considering a franchise opportunity should include franchise re-sales as part of their due diligence checklist. Knowing the potential resale opportunity for a specific franchise is an important piece of information.

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Comments

If they make it that far...

Ed T. writes some good stuff but here in BMM land, it seems like so many Zees don't even get to the real possibility of a sale. They seek short franchise terms in case they fail, which in a self-fulfilling prophecy they then often do, and if not leave them little to sell. All they want to do is get to the end of their term so they can walk away. 

And no matter what the remaining term, their franchise business runs at a loss and they are deeply in debt. Since a business buyer pays on what he thinks the business will profit, they are not going to pay squat for a loser.  Certainly not enough to pay off all the seller's losses. So unfortunately sale of their franchise business is not much of an option for so many of the Hurt Zees here on BMM.

I too read the WSJ article and it wasn't primarily about franchised businesses.

Snap Fitness | Peter Taunton | Gary Findley | Snap Resales

Snap now requires all franchisees use their in house resale department. Is this even legal? Isn't this a conflict of interest for the seller? Doesn't Snap's interest conflict with the seller's interest?

Is it in your contract?

Did Snap F'sees agree to it?  If so, so what.

Snap fitness

Hard to believe this is legal. First time in over 33 years in the industry I've ever heard of this. Lets see what some attorneys post.