How to Sell a Franchise: Steps, Tips & Legal Considerations

Looking for a lucrative sale of your franchise business? 

It could be your big opportunity for growth. 

However, selling a franchise can be tricky. From considering the franchisor's role and willingness to fulfill it to finding the right buyer and complying with the federal franchise rule, there's a lot to manage.

In our discussion today, we offer practical steps and tips for selling your franchise successfully while safeguarding your business interests and complying with the law and your franchisor's requirements.

Let's get to it!

TL;DR - How to Sell Your Franchise

Short on time? Here's a quick overview of how to sell a franchise business:

1. Review your franchise agreement

2. Notify the franchisor

3. Hire business sales professionals

4. Assess the value of your business 

5. Prepare the necessary documents

6. Identify potential buyers

7. Assist the buyer with due diligence 

8. Negotiate the sale

9. Finalize the sale and transition

We’ll discuss the steps later in the article. 

Selling any business independently can be overwhelming. At Exitwise, we can help you hire the best Merger and Acquisition experts to ensure you sell faster and at the most favorable price.

We'll help you recruit and work with M&A attorneys, wealth advisors, finance accountants, and investment bankers to streamline the sale. Schedule a chat with our team at Exitwise to maximize your exit.

How to Prepare for Selling a Franchise

Proper preparation can make a huge difference when selling a franchise business, as the sale process can be trickier than that of an ordinary business. 

Let's go over some preparation aspects to consider:

• Selling Reasons and Timing: Determine your motivation for the sale and the best timing so that these align with your business and personal goals.

• Streamline Operations: You must ensure your business operates as smoothly as possible with minimal inefficiencies that may lower productivity. You can eliminate any redundancies, automate daily tasks, and optimize workflows. 

• Fix Issues that Devalue the Business: You must fix any problems to ensure your customers’ experience is at par with the franchisor’s and industry standards to improve the value of the business. For example, your business’s value may drop if your customer care is subpar and results in customer churn. 

• Update the Franchise Agreement: Ensure there's still enough time before your franchise agreement expires. Also, check that no clauses prevent or restrict you from selling the business. 

• Ensure Total Compliance: You must comply with the franchisor's agreement, policies, and standards, as well as with federal and state franchise regulations. 

• Ensure the Premises Are in Good Condition: When selling your franchise business, the premises must be in ideal condition to present it in the best light to potential buyers. You'll want to update your inventory, equipment, and licenses. The premises should also maintain high cleanliness and safety standards. 

• Prepare Marketing Collateral: Have the right marketing collateral and materials, such as your value proposition, brochures, and teasers. Have your M&A team prepare business sale documents such as an M&A NDA and confidential information memorandum. 

Legal Considerations When Selling a Franchise

Franchise business sales are highly regulated at the state and federal levels. 

Before you sell your franchise, you must comply with the regulations below:

• Franchise Agreement: Examine transfer, intellectual property rights, and territory clauses to ensure they do not restrict or prevent a sale. 

• Franchisor Approval: You must notify your franchisor and obtain their approval for the sale. They might require you to provide details of potential buyers so they can conduct their own due diligence. 

• Assignment Agreements: Once the sale is approved, ask the franchisor for an assignment agreement that outlines the applicable transfer procedures and details. 

• Confidentiality: You must secure sensitive information throughout the sale process by having interested buyers sign a non-disclosure agreement. 

• Lawsuit Clean-Up: If possible, resolve any pending lawsuits. Most franchisors require you to release them from any potential legal hassles. 

• Franchise Disclosure Document: Ensure the franchise disclosure document (FDD) from the franchisor to potential franchisees is available and up-to-date. The Federal Trade Commission (FTC) has franchising disclosure requirements and prohibitions that the franchisor must comply with.

• Federal Franchise Rule: You must comply with the federal franchise rule, the country's overall governing guideline for selling franchise businesses. The FTC offers a comprehensive compliance guide to help the franchise side comply with the amended federal franchise rule. As the seller, ensure compliance with the rule as it also applies to a franchisee selling their unit.

• State Laws: In franchise registration states, you must obtain approval for the sale. Where state laws are missing, the federal franchise rule typically takes effect. 

Keeping up with all the franchising legal considerations can be overwhelming. You'll want to work with an M&A attorney specializing in franchising law to help you identify and understand the applicable requirements. 

Chat with our team at Exitwise to find and work with the best M&A attorney in your industry to streamline the legal part of the sale.

How to Find Potential Buyers for Your Franchise

If you use business brokers or M&A experts to sell your franchise, they do most of the heavy lifting when it comes to marketing the business and finding and qualifying buyers. 

However, if you are operating on a for-sale-by-owner (FSBO) basis, you have several options for finding potential buyers:

• Ask the Franchisor to Buy: In most cases, the franchisor reserves the right of first refusal, which offers them the chance to buy the business before you show it to other buyers. 

• Ask the Franchisor for Leads: If your franchisor isn't interested in buying back the business, they may have leads who have expressed buying interest. They may also have a franchisee looking to buy another unit. 

• Consider Your Employees: Tell your employees about your intention to sell the business as soon as possible. An employee or your management may be willing to buy it.

• Leverage Business Selling Marketplaces: List your franchise on sale and resale marketplaces such as FranchiseFlippers, BusinessesForSale, FranchiseResales, and BizBuySell.

Sales Process of Selling a Franchise

Let's dive deeper into the steps you need to follow to sell your franchise business successfully:

1. Review Your Franchise Agreement 

Sift through your franchise agreement to understand the franchisor's specific requirements and procedures, such as approvals, buyer selection, marketing channels, and transfer fees. 

2. Notify the Franchisor

Alert your franchisor about your intention to sell. 

Depending on the agreement, ask them to approve the sale or buy back the franchise. 

3. Hire Business Sale Professionals

The best decision you can make when selling your franchise is to hire business sales professionals.

You could hire a franchise business broker; however, they may not have experience and expertise in your industry.

Instead, you’ll want to work with a team of M&A experts, including corporate attorneys, wealth advisors, finance accountants, and investment bankers. These professionals can guide you through different aspects of the sale, from the valuation and negotiation to the closing and transition.

If you're ready to explore your options, connect with our team today. We can help you find the right M&A professionals for a smoother sale.

4. Assess the Value of Your Business 

Examine your franchise’s performance, profitability, location suitability, financial performance, assets, customer base, and other aspects to evaluate its worth. 

Your M&A team can help you calculate the value of the business so you can set a realistic asking price that won't scare away prospective buyers or make you undervalue your business.  

You can also try our free valuation calculator to get an idea of what your business is worth before the detailed valuation by the M&A team.

5. Prepare the Necessary Documents

Get all your documents ready for your M&A team, franchisor, and potential buyers. These include financial statements, employee contracts and details, customer lists, franchise agreements, and operational records. 

The M&A team can help you prepare other documents, such as the teaser, confidentiality agreement, and confidential information memorandum. 

6. Identify Potential Buyers

Use various marketing tactics and the tips mentioned in the above section to find ideal potential buyers based on relevant industry expertise, experience, interest in purchasing your business, and financial capability. 

7. Assist the Buyer with Due Diligence 

Once the most promising buyers sign the confidentiality agreement and you've furnished them with additional information, help them conduct due diligence. 

You can do this by providing extra documents, answering their questions, and allowing them enough time. 

8. Negotiate the Sale

Negotiate a good sale with the most suitable buyer. 

The key negotiation aspects include the sale price, payment terms, transition period, potential liabilities, training requirements, and transfer fees. 

9. Finalize the Sale and Transition

Sign and complete the necessary paperwork to close the deal, including ownership transfer documents. 

If the sale agreement requires it, help the buyer settle into the business. You may have to remain in the business for a while or train the new owner and their team.

Considerations After You Sell a Franchise

Once you've sold your business successfully, ensure you fulfill the following considerations:

• Pay the applicable fees or commissions and taxes as necessary.

• Notify the franchisor about the sale and transfer.

• Help the new owner settle in smoothly, if applicable.

• Fulfill any remaining agreements with the new owner, such as complying with trade restrictions and non-compete clauses.

Frequently Asked Questions (FAQs)

Here are common questions business owners usually ask about selling a franchise business:

What is the Best Time to Sell My Franchise?

There's no single best time to sell. Here are some pointers that the timing is ideal:

• When you've reached a peak in operational efficiency

• When your profitability is consistent and on an upward trend

• When the economy is stable, and market conditions are favorable to potential buyers 

• Before you've reached a peak or plateau (when you've extracted as much as possible, but there's still enough left and room for the new owner to take the business to a new level)

How Long Does It Take to Sell a Franchise?

You can sell your franchise in several months to a year or more. 

The sale duration depends on market conditions, financial performance, franchisor and support, the franchise’s brand reputation, and availability of potential buyers. 

Should I Hire A Broker to Sell My Franchise?

You can sell your business without a broker, considering that broker fees can be high and you may not be able to afford the service. If you can afford it, hiring a broker is a good idea as you can sell faster.

However, business brokers don't always have specific industry knowledge and experience. 

You can have better success hiring and working with industry-specific M&A experts, such as financial accountants, wealth advisors, investment bankers, and attorneys. 

Conclusion

Selling a franchise doesn't have to be a challenge. You can contact the franchisor to see if they are willing to buy back the business or if they have interested buyers looking to buy a unit. 

While you can sell independently, hiring M&A experts can help you sell sooner and at the most favorable terms. We at Exitwise help you find industry-specific experts to assist you with the sale. 

Reach out to our team today to optimize your business sale and exit.