The complex journey of selling franchises: Unraveling challenges and opportunities
August 4, 2023 ⋅ 5 min read
Franchises are a popular and successful business model, offering aspiring entrepreneurs a unique opportunity to run established brands with proven success and hopefully, some solid support. However, while owning a franchise can be a lucrative venture, the process of selling a franchise can be more challenging than selling a business that isn’t a franchise. At Baton, I see a lot of franchise unit owners come to us looking for support. In this article, we’re going to outline some common things that we see, in hopes of providing franchise owners (and potential owners) a glimpse into what to expect.
The Initial Investment Predicament
As franchise owners contemplate selling their businesses, one of the primary hurdles lies in the initial investment required to secure a franchise:
High upfront costs
Prospective buyers must contend with upfront franchise transfer fees. These financial commitments can be daunting and may deter potential buyers, especially when they question whether the business's future worth justifies the initial investment. Put yourself in a buyer's shoes for a moment - imagine you're evaluating two landscaping businesses, where one's a franchise and the other is a traditional business. Only the franchise would require you to pay an upfront transfer fee upon acquisition.
Business valuation and worth
Determining the true value of a franchise can be an intricate process. Unlike traditional businesses, franchises come with intangible aspects like brand reputation and the franchisor's support that can significantly impact their resale value. Like with all businesses, market fluctuations and industry trends can further influence a franchise's market worth. Franchise owners are likely to take into account how much they paid to set up the franchise when thinking about their valuation which, unfortunately, typically has little bearing on how a buyer will think about the valuation.
Ongoing Fees and Commitments
Prospective buyers are often cautious about the ongoing fees and commitments associated with purchasing a franchise:
Continuous royalty payments
Franchisees are obligated to pay ongoing royalties, typically calculated as a percentage of their revenue, to the franchisor. While these fees often provide continued support and resources, they also affect the overall profitability of the business, which can influence potential buyers' decisions. Similar to the situation above, if a buyer is evaluating two different opportunities - one being a franchise and one not, they will have to weigh the fee with the support they get.
Adherence to operational standards
Franchise agreements come with strict operational standards that franchisees must follow. While these standards ensure consistency across the franchise network, they can act as deterrents for buyers seeking flexibility in running the business.
Restricted Buyer Pool
The sale of franchises can be further complicated by the contractual limitations imposed by franchise agreements:
Franchise agreements and non-competition clauses
Franchise agreements often include clauses that restrict franchisees from selling to competitors. While these clauses are designed to protect the franchisor's interests and maintain brand integrity, they can significantly impact the pool of potential buyers and limit the seller's options. This, ultimately, limits the price. Selling to competitors can often yield a better price as savvy business owners use acquisitions to create synergies and expand operations.
Franchisors may require prospective franchisees to meet specific criteria, such as financial qualifications or industry experience. These requirements can make it challenging to find qualified buyers, further narrowing the scope of potential buyers.
Exit Strategy and Succession Planning
Having a robust exit strategy is vital for a successful franchise sale:
Franchise resale support from the franchisor
The level of assistance provided by the franchisor during the selling process can significantly impact the sale's success. Franchisors who offer comprehensive resale support, including marketing and buyer vetting, can help sellers navigate the complexities and find suitable buyers.
Creating an exit strategy from the beginning
Emphasizing the importance of formulating a clear exit plan from the outset of owning a franchise. Planning for the eventual sale allows franchise owners to prepare the business for a seamless transition, making it more appealing to potential buyers.
Why franchises can be good to sell
Amidst the challenges, selling franchises can also present unique opportunities for both sellers and buyers, including:
Established Brand Recognition
Franchises often benefit from well-known brand names that can attract potential buyers seeking recognizable business opportunities. The brand's existing reputation can significantly contribute to a smooth and successful sale.
Proven Business Model
Buyers may find comfort in investing in a business with a successful, tried-and-tested operating model. Franchises provide a proven track record of success, reducing the risk for potential buyers
Training and Support
Franchise systems typically offer comprehensive training and ongoing support, which can be enticing for potential buyers who value guidance and resources as they step into business ownership.
Selling a franchise is not without its complexities, but with careful planning and the right approach, it can lead to a successful and rewarding transaction. Understanding the challenges and opportunities is crucial in navigating this intricate journey. Franchise owners looking to sell should be aware of the initial investment predicament, ongoing fees, and commitments, as well as the restricted buyer pool. On the other hand, potential buyers should recognize the benefits of purchasing a franchise, such as brand recognition and a proven business model.
If you're considering selling your franchise, seek professional guidance from experts in the industry like Baton Market. With a successful track record of selling plenty of franchises, our team can help you navigate the complexities and achieve a favorable outcome. Whether you're a seller looking for qualified buyers or a buyer seeking the right franchise opportunity, we can provide the expertise and support needed for a smooth and successful transaction.