Here at Apex we’ve sold every type of business you may have heard of, and at least a dozen you could probably have never imagined. But franchise businesses add a few additional wrinkles to the process that it’s important for any buyer to be aware of. In this article, we’ll discuss those wrinkles and how you can smooth them out.
Who’s the Boss?
Unlike other transactions, there’s a third party besides buyer and seller here: the franchisor. Each franchise agreement is different, but many franchisors will include in the original contract that they signed with the franchisee:
- A right of first refusal for buyback: they can (though often do not) exercise the right to buy back the business from you at terms stipulated in the contract.
- The ability to vet a buyer: very often these buyers will have to go through the same financial vetting process that the original franchisee did, and will also have to be interviewed for proper fit for the franchise itself
- The ability to levy additional costs: there will often be a transfer fee that will be paid directly to the franchisor simply for the “right” to transfer the franchise to someone else. Additionally, the incoming buyer will likely have to go through the same (paid) training that the original franchisee did.
We urge our clients who are considering buying or selling a franchise business to be very familiar with the terms of the original FDD (franchise disclosure document) that everyone is subject to so there is no misunderstanding before starting down the road to a transaction.
What are the Pros?
There are lots of pros of buying into a franchise. With top tier franchises, you’re buying into something that has a well-established system. It’s so well-established that they’ve multiplied the system with strangers. There is an operations manual that you will not only be given, but thoroughly trained on.
You also have bought into something that has a strong brand presence. Customers know exactly what you provide within an established brand halo, and often have loyalty to the brand above and beyond their personal loyalties to ownership. This makes transitions simple.
You will also have the chance to meet other franchisees to see what improvements and changes you can make to take the business you are buying to the next level.
What are the Cons?
In addition to the vetting process listed above, the franchisor itself is, in a way, a direct competitor to the seller. The franchisor is always looking to sell more units and may be able to provide incentives and sweeteners to a deal for a new franchisee that someone who is just looking to sell/transfer his/her franchise to someone else can’t. However, the overall mission of any franchise is to grow, and if a potential buyer looks like a solid and qualified possible franchisee, a healthy franchisor isn’t going to endanger bringing that buyer into the organization as a new franchisee.
There’s also a smaller buyer pool. We’ve said in previous articles that the bigger the buyer pool, the larger the number of possibilities. Because of the limits of creativity imposed in a franchise model, there are fewer people open to buying into them. But that may also be an opportunity for a buyer, as he/she will be competing with fewer people for the best franchise opportunities.
Looking to buy or sell a franchise business? We’ve been through those transactions hundreds of times. Let us put our expertise to work for you.