Franchises - buying or selling an existing franchise

 

Buying a franchise. Is it for you?

  1. Do you follow plans and direction well?
  2. Do you recognize the benefit of a proven structure?
  3. Can you learn from others experience?
  4. Can you look beyond a monthly fee to affiliate yourself with a household name?
  5. Do you understand why almost half of all goods and services purchased are done so through a franchise?
  6. Do you need a business plan and financing to obtain a business loan?
  7. When you are traveling and are in an unfamiliar area and find yourself hungry, do you look for a familiar name or do you seek out an unknown name in an unknown area of town?
  8. If a close family member wanted to borrow $200,000 to open a new well known franchise in your area, or start up a business that he really thinks will take off, which would interest you?

Those are some of the questions you need to ask yourself and answer honestly if you are considering purchasing a new or existing franchise. A franchise is not for everyone. Some of the most successful are retired military personal. They are accustomed to following directions, a structured plan, they do not look for ways to beat the system and don't question why.

 

If you already have a business, do you-

  1. Routinely short change the time sheets on the help?
  2. Under report sales to keep the state's 5 or 6 percent sales tax for yourself?
  3. Under report earnings at year end to save 12-15% on your tax return?
  4. Have two sets of books?
  5. Have two pads of invoices, one with sequential numbers and one with no numbers?
  6. Does your POS system frequently crash requiring a new hard drive or Z board?
  7. Do you change cash registers every year?
  8. Do you find yourself at the cash register a lot and hitting the 'no sale' key quite a bit?
  9. Do you offer discounts for 'cash no receipt' transactions?
  10. Do you pay many of your vendors 'cash no receipt'? (even though they log your sale in to corporate... oh yes they do! Just because they told you it was extra means nothing. Except salesmanship from corporate...)
  11. Do you think you invented the idea of buying goods at discount clubs and repackaging them as your own? (and yes all those sales are reported against your account/social security number as well)
  12. Do you collect pre-1988 20's, 50's and 100 dollar bills?
If you are smiling and know what I'm talking about, more than likely, you will not be happy with a franchise. No one will convince you of a better way to do things.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

If you are serious about obtaining a franchise, the following is for your help. In addition, you need a good personal, business and marketing plan to get anywhere with a bank. Many franchises will not give more than basic information without your personal background and financial information. Some of the better ones will not permit you to view stores until you have been approved by the franchise. With some, you can't even be given an address to view an existing location for sale unless you are on the approved list. That's the power of having a franchise.

When you call a broker asking where the Dunkin Donuts, Burger King or Blockbuster is that you saw advertised, don't take it personal when they ask if you are on the approved franchiser list and have to verify it before revealing the location to you. It is the rules required of us by the franchise.

The phone you hear ringing in the background is someone else calling who is approved...

 

 

Overview

The relationship between franchiser and franchisee is a long-term one. The typical franchise agreement may have an initial term of 10 to 20 years plus renewal terms of 5 to ten years or more. During such a period of time, many things can and may occur, including:

  1. The franchisee may desire to sell his or her franchised business to a third party as a going concern.
  2. The franchisee may desire to transfer all or a portion of the franchised business to his or her spouse or children for estate planning or other reasons.
  3. The franchisee, or the principal individual in a corporate franchisee, may become disabled or incompetent.
  4. The franchise, or the principal individual in a corporate franchisee, may die.

In addition to the traditional corporate, conveyancing, tax and other issues associated with the transfer of any business, there are additional concerns due to certain rights which the franchisor may have that are typically set forth in the franchise agreement. These rights may include:

  1. The franchisor's option to purchase the franchised business.
  2. The franchisor's right of first refusal to purchase the franchised business
  3. The franchisor's conditions precedent to its consent to a transfer

 

Sale of a franchised business

In addition to the myriad of reasons why a franchisee may want eventually to sell his or her franchised business, there are a number of reasons why a prospective franchisee may want to buy an existing franchised business rather than buy a new start up franchise from a franchisor. These reasons include

  1. Locating a unit in a ;more desirable and established location.
  2. Purchasing a unit with an existing operating history
  3. Possibly assuming an old, more advantageous franchise agreement

Asset vs. Stock Sale. (see previous report) click here

 

Dealing with the Franchisor

Most newer or sophisticated franchise agreements have provisions giving the franchiser certain rights in the case of the franchisee's proposed transfer of the franchised business regardless of whether the franchise sells his or her assets or sells his or her stock. However, the franchise agreement should be thoroughly reviewed because the sale of stock may not be addressed. A thorough review of the franchise agreement should be undertaken before an offer to purchase is made. Some things to look for:

  1. No encumbrancing
  2. "For Sale" restrictions
  3. Franchisor's right of first refusal

 

Conditions precedent to the Franchisers consent to transfer

Most franchise agreements provide that the grant of the franchise to the franchisee is personal and that the franchisee is prohibited from selling the franchised business without the prior written consent of the franchiser. Usually, the franchise agreement details the conditions in which the franchiser will consent to a transfer, including:

  1. Waiver of right of first refusal
  2. Absence of both monetary and non-monetary defaults by the franchisee
  3. General release from the franchisee to the franchiser
  4. Payment of a transfer fee which may or may not include a training fee.
  5. Execution by the transferee of the then-current form of the franchise agreement, rather than assumption of the existing franchise agreement.
  6. Transferee must meet the requirements of the franchiser including reputation, business skills and financial capacity.
  7. Completion of training.
  8. Renovation and upgrading of the franchised business which can be substantial dollars.
  9. Continued occupancy of the premises.
  10. No excessive purchase price.
  11. No release of the original franchisee

 

Estoppel Letter from the Franchiser

Regardless of whether assets or stock is being purchased, it is advisable to obtain a written estoppel letter from the franchiser confirming the following:

  1. Consent to the transfer.
  2. Waiver of the right of first refusal.
  3. Acknowledgement there are no defaults by the franchiser or the franchisee under the franchise agreement and related documents.
  4. That there are no addenda, riders or modifications of the franchise agreement or oral or "side" agreements.

 

Purchasing an existing franchised business

In addition to the seller responsibilities, a buyer has added responsibilities to ensure making an intelligent investment decision.

Obtain and review a current UFOC (Uniform Franchise Offering Circular) or FTC Disclosure Statement from the franchiser. Understand all of the provisions including:

  1. Whether an exclusive or protected territory exists.
  2. What terms are you required to purchase form the franchiser.
  3. Duties of the franchiser.
  4. Services and support of the franchiser.
  5. Performance standard.
  6. Insurance requirements.

Most franchise agreements require the purchaser to sign a new then-current form of franchise agreement rather than assume the seller's existing franchise agreement.

Talk and visit other franchisees to better understand the business and how well the unit you are purchasing is doing.

Visit the franchiser's headquarters.

 

Have in writing in the purchase agreement:

  1. The amount of transfer fee and or training fee and who pays.
  2. The extent of any required renovation or upgrading.
  3. Personal guarantee by the purchaser of the franchise agreement.
  4. Make closing after, and contingent upon, the purchaser's completion of the franchiser's training program.
  5. Representation and warranties of the seller with respect to the franchise agreement and ancillary documents.
  6. Covenant not to compete from the seller in addition to the franchise agreement.

These are just a brief overview of the additional complexities involved purchasing an existing franchise. This information was gathered at a franchise seminar taught by Keith J. Kanouse, P.A. a franchise attorney.

Seek competent professional help when buying or selling a franchised business opportunity.
Bizology - the study of business for sale

Bizology.com

email to : info [at] bizology [dot] com
Chambersburg, PA 17201-1712
 
 
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