Franchise Re-sales

The franchisor needs to actively encourage re-sales to its franchisee network, both via outside purchasers and between franchisees. The re-sales process can be painless and profitable, says John Chambers of Chambers & Co

In their early years franchisors naturally think mostly of recruiting franchisees, but rarely think of the next stage - how these franchisees will exit. Once the franchisor has achieved good network coverage, it may then look to reinvigorate some existing territories by facilitating re-sales.

Some of the most common problems that hit franchisors are:

  • After a lot of work on both sides the deal falls through.
  • The sale process can take forever, with a new franchisee missing their designated training course.
  • The franchisor is still owed money by the outgoing franchisee, and exposed to post termination claims.
  • The protracted process takes up too much franchisor time.

The key to a successful re-sales process is for the franchisor to have a clear idea of the objectives and control the process right up to the new franchisee's launch. It helps if franchisees have been thinking about their exit strategies from as early as the recruitment stage.

The franchisor needs to actively encourage re-sales to its franchisee network, both via outside purchasers and between franchisees. This is best done by word of mouth, but also by the franchisor being transparent about the sales process - for example by setting down the process in the manual.

The sales process itself will usually start with a valuation. The franchisee may go to an outside valuer, who will very often give an inflated idea of the worth of the business. To be blunt, a franchise is only worth what someone is willing to pay for it, and the franchisor is often in the best position to help the franchisee.

Once the target price has been set the franchisee should formally instruct the franchisor to proceed to look for a buyer. This will usually include an undertaking to meet any administration costs, and all the other costs set out in the sale provisions of the franchise agreement. Written undertakings should ideally be obtained even if the franchisee will initially try to find his own buyer. It is also helpful for the franchisee to prepare a short sales pack about the business, particularly when premises are involved.

As soon as a deal has been agreed, and the franchisor has checked that the purchaser has sufficient funding, then brief details need to be formally agreed, subject to contract. This can often be done by simple letter, facilitated by the franchisor and signed by both parties.

The sale, whether it be an asset or a share sale, must be recorded in writing. The document must be something that is fair to both vendor and purchaser, but at the same time protects the interests of the franchisor. This will usually mean the sale being conditional upon any outstanding debt from the outgoing franchisee being settled; a clean break being made between the outgoing franchisee and the franchisor; possible retentions against work guarantees; and of course restrictive covenants.

The best way to facilitate this is for the franchisor to have a standard sale agreement which it insists both parties use. This does not stop either of them taking independent advice, but the franchisor should run the sales process and keep both parties to a deadline.

The best option for all concerned is for the franchisor to instruct its own lawyer to drive the sales process through, particularly if the parties have solicitors who are unfamiliar with franchising. Quite frequently non-specialist solicitors struggle with the concept of franchising, and this can delay the sales process considerably.

A painless exit, with the franchisor squared away financially, and a new, happy and businesslike franchisee in the network.