Franchises - buying or selling an existing franchise
Buying a franchise. Is it for you?
- Do you follow plans and direction well?
- Do you recognize the benefit of a proven structure?
- Can you learn from others experience?
- Can you look beyond a monthly fee to affiliate yourself with
a household name?
- Do you understand why almost half of all goods and services
purchased are done so through a franchise?
- Do you need a business plan and financing to obtain a business
- 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?
- 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-
- Routinely short change the time sheets on the help?
- Under report sales to keep the state's 5 or 6 percent sales
tax for yourself?
- Under report earnings at year end to save 12-15% on your
- Have two sets of books?
- Have two pads of invoices, one with sequential numbers and
one with no numbers?
- Does your POS system frequently crash requiring a new hard
drive or Z board?
- Do you change cash registers every year?
- Do you find yourself at the cash register a lot and hitting
the 'no sale' key quite a bit?
- Do you offer discounts for 'cash no receipt' transactions?
- 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...)
- 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)
- 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...
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,
- The franchisee may desire to sell his or her franchised business
to a third party as a going concern.
- 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.
- The franchisee, or the principal individual in a corporate
franchisee, may become disabled or incompetent.
- 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:
- The franchisor's option to purchase the franchised business.
- The franchisor's right of first refusal to purchase the franchised
- The franchisor's conditions precedent to its consent to a
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
- Locating a unit in a ;more desirable and established location.
- Purchasing a unit with an existing operating history
- Possibly assuming an old, more advantageous franchise agreement
Asset vs. Stock Sale. (see previous report) click
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:
- No encumbrancing
- "For Sale" restrictions
- 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,
- Waiver of right of first refusal
- Absence of both monetary and non-monetary defaults by the
- General release from the franchisee to the franchiser
- Payment of a transfer fee which may or may not include a
- Execution by the transferee of the then-current form of the
franchise agreement, rather than assumption of the existing franchise
- Transferee must meet the requirements of the franchiser including
reputation, business skills and financial capacity.
- Completion of training.
- Renovation and upgrading of the franchised business which
can be substantial dollars.
- Continued occupancy of the premises.
- No excessive purchase price.
- 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:
- Consent to the transfer.
- Waiver of the right of first refusal.
- Acknowledgement there are no defaults by the franchiser or
the franchisee under the franchise agreement and related documents.
- 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:
- Whether an exclusive or protected territory exists.
- What terms are you required to purchase form the franchiser.
- Duties of the franchiser.
- Services and support of the franchiser.
- Performance standard.
- 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:
- The amount of transfer fee and or training fee and who pays.
- The extent of any required renovation or upgrading.
- Personal guarantee by the purchaser of the franchise agreement.
- Make closing after, and contingent upon, the purchaser's
completion of the franchiser's training program.
- Representation and warranties of the seller with respect
to the franchise agreement and ancillary documents.
- Covenant not to compete from the seller in addition to the
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.