When you are acquiring franchise resales, it is common to wonder exactly which terms will be negotiable in the transaction. For restaurant buyers, agreement on certain terms could make or break the financial decision to move forward.
Here are three of the big items that buyers frequently want to negotiate and the reality of reaching new deal terms on each one from an experienced Restaurant Broker.
Negotiation Point 1: FDD Terms for Franchise Resales
There are clearly items that cannot be negotiated as you are working to acquire restaurant franchise resales. These include:
- The franchisor’s right to approve you for the brand. If you have a competing concept or don’t have relevant experience or cash flow, the franchisor is under no obligation to approve you in a franchise resale situation. What is negotiable, however, may be the franchisor’s “stated” net worth or liquidity requirements. The brand may approve a deal that has sufficient cash flow without the cash requirement they would require of someone building units from the ground up.
- The use of the logo and trademark and brand processes are not negotiable when acquiring franchise resales. The brand will not alter their way of doing business, particularly for a unit that is transferring to someone new so if you want to implement menu changes or otherwise alter the image of the brand, this is a non-starter in these situations.
On the other hand, this restaurant broker frequently sees a brand willing to negotiate some financial terms on franchise resales which include:
- Payment of the transfer fee. This can be a large amount as most transfer fees can be as small as $5000 to as much as 75% of the then current franchise fee. That can add up for multiple franchise resales acquired simultaneously.
- Territory Rights – For franchise resales, there is an opportunity to renegotiate the protected territory associated with the units being acquired. This can be important as a new operator looks at expanding or growing market share upon acquisition.
- Remodel or Upgrade Requirements. It is not uncommon for brands to see turnover of units as a time to require an upgrade that can be costly. Those acquiring franchise resales should know that these costs to upgrade can be negotiated with the brand including when they occur, the amount that must be spent, and sometimes, can be offset by concession on royalties for the money incurred to improve the location.
Negotiation Point 2: Leases and Guarantees
For those acquiring franchise resales, it is important to remember that the landlord already has a tenant in place who is paying faithfully and is probably, under a personal guaranty. For those reasons, it is difficult to renegotiate lease terms for franchise resales. These include:
- Rent abatement. While new tenants often get several months of rent to get started, franchise resales are different animals altogether. The business is operating and the build out is complete. Unless a brand new lease is being negotiated, restaurant buyers will generally not see any form of rent relief on a transfer.
- Rent Reductions. For landlords who already have a tenant in place paying the monthly rental amount and often, with negotiated options to renew, they are generally not inclined to renegotiate rent terms. Franchise resales are usually accompanied by an assumption of the existing lease terms and any options to renew. Rarely are they renegotiated.
Items that may be negotiated as part of the transfer could include:
- Terms of the lease guaranty for a store in business for many years. Often there is a “burn off” clause to the guaranty and if that has been satisfied by the prior tenant, those purchasing franchise resales can work to minimize their own guaranty as the concept has proven successful.
- Negotiation for additional option years or more term to the lease. Landlords are generally accepting of additional years added to the lease through addition options to renew or extension of the term. If there is SBA lending on a deal, this is generally required as you need a minimum of ten years of term for funding unless you are willing to amortize the loan over a shorter period (that coincides or is coterminous with the lease).
Negotiating Point 3: Purchase Terms for Franchise Resales
The last points of negotiation on franchise resales are with the seller. There is always room to negotiate deal terms with the seller including any of the following:
- Purchase Price. The asking price and purchase price are usually not one and the same. There is often flexibility on the seller’s part to accept something slightly less than where his franchise resales are priced but the only way to know for sure is to submit the offer and wait for the counter.
- Deal Terms. Two things are important to sellers. Time and money. If you are acquiring existing franchise resales and are already part of the brand, that’s a benefit to the seller as he will not have to wait for training to occur before closing. That can help on the purchase price negotiations as a seller will see a faster path to closing.
- Training and Support. The ability for the seller to provide ongoing support is also negotiable, especially for those purchasing for the first time. This could be a valuable concession.
- Remodel Obligations. While the brand may require certain upgrades or refresh, as a new buyer, it can be a challenge to locate vendors and make the necessary upgrades. This is an opportunity to negotiate with the seller to complete required upgrades prior to the transfer of the franchise resales you are acquiring.
Franchise resales are an excellent entry point into the market for those who are new to the business or looking to expand. They have existing infrastructure in place, including trained personnel and are already generating cash for the business. If you are interested in seeing the many franchise resales at We Sell Restaurants, simply visit our website for a robust inventory of opportunities. Our expert Certified Restaurant Brokers know how to negotiate these deal terms and all others when you are acquiring franchise resales for your portfolio.
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.