If you develop a franchise brand, it is inevitable that you will have franchise resale situations. The International Franchise Association estimates that 5% to 10% of any franchise concept will change hands each year.
Why do these franchise resale situations occur? Some operators are simply better at building a store than operating a location. Field consultants are the first to know which stores are trailing the company when it comes to operations. Owners that received rave reviews on completing their opening checklist sometimes find that once the lights are on, the reality of day to day operations is less exciting. The passion fades and their operations scores are on par at best.
Other operators may have brought several parties to the table and convinced the development team they had a plan to run the store. Bob would operate and John would handle finances and back of house. Bob attended the training. Now that the store is open, he is missing in action and John is asking for help as their partnership is on the ropes.
Other new operators came in well-funded but spent so much money on the build-out that they moved into operating without enough capital to market, advertise and wait for the build it will take for the business to grow. This becomes a franchise resale.
Then there are the strong operators who have done an amazing job for many years. Unfortunately, they are not ready to refresh, remodel or upgrade and renew their agreement as they reach the 10-year mark. They are ready to retire and cash in and seeking to resell their franchise.
Lastly, you have the life-altering and unforeseen conditions that create franchise resale situations. These are referred to in the industry as the “three D’s” - divorce, death, and drugs. These scenarios are why it is critical to have a franchise resale program in place. Developing a solid vision is essential to keeping your brand on track for success.
Unfortunately, the franchise development team is often tagged with trying to bring a buyer to the table for a franchise resale. This can put them at a severe disadvantage and may even lead to larger problems for your brand. Here are five reasons why it is a bad idea for your franchise resales to be handled by your development team.
The Candidate for a Franchise Resale is a Different Lead Altogether
The buyer for a franchise resale is more risk-averse and less willing to take on the unknowns of establishing a new unit. He or she is not even in the leads you are creating for your development team. Without candidates, your team is set up for failure. Many brands simply have their development team reach out to other franchisees to negotiate a deal. That may still be a bad idea. Continue reading to learn why.
The Franchise Resale Candidate is All about the numbers
Your well-trained franchise development team members have been advised to never, ever, talk about any franchise numbers unless they are in your Item 19 disclosure. They do not stray from the Item 19 financial representations, (and they shouldn’t). Unfortunately, the candidate for a franchise resale is ONLY interested in the numbers and the past performance.
It is not fair to ask your development team to switch gears, understand the valuation process and begin disclosing numbers when their entire culture is built around selling opportunity and blue sky. The franchise resale buyer is focused on actuals and history, not future opportunity.
Franchise Resale Pricing Should be Determined by An Expert
Placing values on franchise resale opportunities is a precise science. It is a math problem with a right and wrong answer. Comparable pricing sources, recasting to SBA lending standards and financial expertise are just part of what comes into play for deciding on a listing price. This is clearly expertise beyond the scope of a franchise development team member and should be outsourced to an expert. In addition to that, see the next point. If the pricing is incorrect, the lenders will not be able to establish funding and you are back at square one.
Conflict of Interest Anyone?
Determining the price and negotiating the delicate balance between a buyer and seller of a franchise resale means a different party’s interest is always in play. Where is the loyalty of the brand? Is it to the new franchisee you are landing who is buying this location? Does it belong to the existing client already in a franchise agreement with you? It is difficult to navigate these waters and have both parties happy at the closing table. Your legal team should weigh in and issue a strong position on how these will be handled if you decide to run franchise resales within your development team. This inherent conflict of interest is another reason why franchise resale situations are best left to experts.
It may not be Legal
Yes. There is that pesky legal requirement. Twelve states in the U.S. require that anyone performing business brokerage (and a franchise resale certainly qualifies), must be licensed as a real estate agent. One other state requires registration with their securities division. The crime is a misdemeanor in some states and a felony in others. If you are not familiar with the licensing laws, you may be placing your development team at risk in certain states by asking them to facilitate a transaction without proper licensure. If you connect a buyer and seller, collect any form of a fee for the services (flat fee or percentage of the sale) and facilitate any kind of purchase, you are probably subject to these licensure laws. This would be another place you want your legal department to provide a green light or perhaps eliminate certain states you would work in.
Despite these five reasons, it is not unusual to see unsuspecting brands push the franchise resale function onto their development team. If you are in development, these issues should be raised with the brand leadership. It will help them understand why franchise resales are best handled through an independent third party.
A third-party expert can set pricing, does not have a conflict of interest, has candidates seeking resale opportunities and can disclose past performance financial history with no issue. They are also (presumably), able to provide proof of appropriate licensure. This eliminates the risk to the brand cited in this article.
Once a candidate is found for the franchise resale, the external expert can make any purchase agreement contingent upon franchise approval. At that point, franchise development can disclose the candidate and confirm they are a fit for the brand, eliminating all the risks and potentially upselling them additional units at that time.
If you have questions about establishing a franchise resale program for your brand, contact We Sell Restaurants. We have worked with some of the largest brands in the nation to establish an appropriate franchise resale program that delivers strong results and eliminates the risks to your development team outlined above.
Robin Gagnon, Certified Restaurant Broker®, MBA, CBI, CFE is the co-founder of We Sell Restaurants and industry expert in restaurant sales and valuation. Named by Nation’s Restaurant News as one of the “Most Influential Suppliers and Vendors” to the restaurant industry, her articles and expertise appear nationwide in QSR Magazine, Franchising World, Forbes, Yahoo Finance, and BizBuySell. She is the co-author of Appetite for Acquisition, an award-winning book on buying restaurants.
We Sell Restaurants is the nation’s largest business broker franchise focused exclusively on the sale of restaurants, with 20 years of experience in helping buy, sell and lease hospitality locations. We Sell Restaurants and its franchisees have sold thousands of restaurants across the county and maintain a listing inventory of more than $120 million online at their powerhouse restaurant for sale marketplace, including independent and restaurant franchises for sale. We Sell Restaurants is offering franchise opportunities for their brand in select market areas. For more information, visit www.wesellrestaurants.com