Franchising has come of age. Originating with Albert Singer in 1851 (who used franchising as a method of distributing and servicing his eponymous sewing machines), the use of franchising grew slowly over the following century before gathering pace in the 1990s and booming in the 2000s. For many “early adopters” who invested in franchises during this boom, the time has now come to consider selling their business and realising the investment that they have built up over the years.
Making a profit might not be the only reason for a Franchisee selling their business. The Franchisee might be looking to retire, relocate, pursue other business interests or they might simply have realised that the business they chose is no longer for them. The best exit for such a franchisee is to sell their business as a “Franchise Resale”, but who do they sell it to?
Purchasers of Franchise Resales are those people seeking the traditional benefits of franchising (training, support and a proven business model) twinned with some of the following advantages:
- Brand recognition
- Track record
- Cash flow
- Compliance with agreement
- Approval of purchaser
A purchaser of a Franchise Resale will not have to develop the brand from the outset in the local territory. The previous franchise owner will have done much of the difficult work in establishing the brand locally. This may, for example, include a Twitter feed or Facebook page with a number of local followers/likes.
The business will usually have been trading for a while and will have a documented track record of sales, customer lists and, potentially, existing contracts in place with customers. This track record allows a purchaser to make informed business decisions based on actual historic figures rather than anticipated projections. A purchaser of a Franchise Resale should have much greater visibility of the history of the business and its chances of success in the future. This situation is, generally speaking, more attractive to banks as they can make their credit assessment on the basis of actual trading data.
TUPE regulations apply to the purchase of a Franchise Resale. As such, the employees in a franchise business have a right to transfer with the business and become employees of the purchaser. This means that from day one, the purchaser will have an experienced team who have already been trained in the operation of the business. The outgoing franchisee could be invited to remain involved in the business for a fixed period of time following the sale which helps ensure a smooth handover of the franchise.
Rather than starting from scratch, winning customers and only then being able to generate any turnover, buying a Franchise Resale often means that there will be established income from the first day of trading from existing customers of the franchise business. The purchaser’s main task is then to ensure that he or she builds on this to grow the business.
Naturally, a purchaser of a Franchise Resale will pay more to acquire the franchise business than it would have done to acquire the original virgin territory. However, the extra sum required to be paid to buy the resale should be offset against the increased value of the business that has been achieved as a result of the outgoing franchisee’s efforts. It may well be worth the additional money in order to benefit from the enhanced benefits provided by a Resale.
The process of buying or selling a Franchise Resale is similar to any business purchase or sale with one very important difference: the Franchisor’s consent.
A Franchise Resale involves not just one party (the Purchaser) agreeing to buy the business of another party (the Seller), it also involves a third party (the Franchisor/Brand Owner) who approves the deal (albeit the Franchisor may chose not to be a party to the sale documentation itself).
There are many reasons why a Franchisor requires to provide its consent to the proposed Resale deal:
Compliance with Agreement
the Franchise Agreement will have a variety of conditions with which the Seller must comply before it is able to sell its business. For example, the Seller must not be in breach of the Franchise Agreement and it must have paid all sums owing to the Franchisor prior to the sale going ahead. Often Franchise Resale agreements will contain a clause which requires the Purchaser to pay the purchase price directly to the Franchisor who will deduct any sums owed to it by the Seller (including any commission that the Franchisor is entitled to or any costs (such as legal costs) which are set out in the Franchise Agreement). Once these deductions have been made, the Franchisor then remits the balance to the Seller.
Approval of Purchaser
The Purchaser of the Franchise Resale will become the Franchisor’s new “franchisee”. Given this, the Franchisor needs to be satisfied that the Purchaser is suitable and meets its criteria of a franchisee (including having the availability of capital not just to fund the purchase, but also to ensure sufficient resources to fund the further development of the franchise).
In recent times, we have noticed an increasing number of Franchisors who are adopting a standard form of Franchise Resale Agreement within their network. This document is given to the Seller and Buyer as the basis for the deal and, while negotiation around the edges is permitted, the Franchisor expects the transaction to proceed on substantially similar terms to the Franchise Resale Agreement. This helps to reduce the overall legal cost of the transaction for all parties.
With some Franchise brands reaching saturation in the UK to the extent that you can only buy a franchise via a Franchise Resale (rather than through the traditional approach of acquiring a virgin territory), we predict that the number of Franchise Resales taking place will continue to grow year on year.
Authors: David Kaye and Andrew Fraser
David and Andrew act on behalf of franchisors and franchisees throughout the UK and Internationally on all manner of franchising issues including setting up franchise networks, buying and selling franchised businesses and managing franchise disputes.