Selling a business is a significant undertaking for an owner; Selling a franchise presents a distinct set of considerations for both the seller and the potential buyer. While the fundamental principles of mergers and acquisitions still apply, the presence of a franchisor introduces an additional layer of complexity to the transaction. Understanding these unique aspects is crucial for franchise owners contemplating an exit.
Sara Burden, a Principal at Walden M&A, shares her experience with B2B franchise sales where Walden sold a franchise for a staffing service.
“The biggest difference I have found in working with franchises versus non-franchise businesses is that you’ve got another layer. The franchisor is a third party with tremendous control over the process as well as who is accepted as a buyer,” says Burden.
This additional layer of involvement can significantly impact the sale timeline.
“We were ready to close on business by the end of February, but we did not end up closing the deal until late April because the franchisor had certain milestones they required of the buyer,” says Burden.
These requirements can often include in-depth interviews at the franchisor’s headquarters and extensive training for the new owner.
“The buyer had to go through all this before they would allow the closing on the territory being purchased. Working out those time differences took an extra 6 to 8 weeks for us,” Burden adds.
This extended timeline can be a source of anxiety for sellers.
“My concern was that something negative could happen because in our business, time kills deals. Our seller was great from the beginning. They wanted the sale to work and were flexible in dealing with the rules of the franchisor to get the transaction completed. This is the biggest difference I’ve experienced when it comes to selling a franchise – the delays from time lost while adhering to their rules,” Burden shares.
Franchisor Scrutiny: A Two-Way Street
While the franchisor’s involvement can present challenges, Burden also points to the benefits it provides, particularly in the thorough vetting of potential buyers. The franchisor’s rigorous approval process offers a level of assurance for both the seller and the ongoing health of the franchise system.
“The good news about this particular franchise system – they are so thorough when they pick a new franchise owner. They put them through a lengthy interview and a structured training process,” notes Burden. This scrutiny goes beyond a simple financial check. “They vet the buyer out as thoroughly as SBA would for a loan. They want to know that in the event something happens and there is a downturn of several months, there is sufficient working capital in place to financially manage the business. They were thorough.”
This meticulous approach gives Burden confidence in the buyer’s future success. “I know anytime I sell for this particular franchisor, if the buyer passes their muster, they’re going to be successful,” she states.
This two-way scrutiny is a crucial aspect of franchise sales. While a buyer will certainly be evaluating the financial and operational health of the specific franchise location, the franchisor is simultaneously evaluating the buyer’s capability to uphold the brand’s standards and ensure its continued success.
Benefits of the Franchise Model
Despite the added layer of complexity, the franchise model often provides significant support systems that can be attractive to buyers. As an example, Burden highlights the back office function of billing and collecting on accounts receivable as a substantial benefit in the staffing franchise examples. “If the client’s own back office had to handle these accounting steps, it could have required another full-time person, maybe even one and a half people, to keep up with invoices, collections, and processing of payrolls. This is a value-add of being part of some franchises,” she explains.
Additionally, franchisors often provide software, support, and even legal assistance for their franchisees, offering a safety net not typically available to independent business owners.
Misconceptions and Realities of Selling a Franchise
Burden acknowledges there might be misconceptions about buying and selling franchises, though her experience is exclusive to the resale of established franchise businesses. She speculates about the perspective of someone buying a new franchise: “My guess is somebody buying a brand new franchise is getting into it expecting the franchisor to give them the training and the support they need, but they’re not going to run the business for them. It’s still up to the new owner to develop the business and generate sales and profitability.”
However, in the case of an ongoing franchise business with a history of revenue and profitability, buyers approach it like any other business acquisition. “A buyer coming into this scenario is really looking at it first as an ongoing business; the same way they would if it were a manufacturing or distribution business,” she explains. The franchise component then becomes an added benefit, offering a built-in support system. “They get introduced to the franchise component and discover, wow, I’ve got support behind me to make this thing continue to be successful. And I think in these scenarios, it’s a positive for the buyer,” she concludes.
The reputation of the franchise brand is also a critical factor. A reputable franchisor will often foster a strong community among its owners, providing opportunities for networking and learning from one another. “Some have quarterly conferences where owners can attend and learn from one another. They’re extremely supportive,” Burden observes, adding, “It’s like you’re entering into a community.”
Strategies for a Successful Franchise Sale
For franchise owners considering a sale, Burden emphasizes the importance of preparing the business as they would any other for a successful M&A transaction.
“On the sell-side, whether it’s a franchise or a non-franchise business, the seller is focused on what they can do to make their business more attractive to a potential buyer,” she states.
This preparation includes preparing for due diligence by getting the financial records in impeccable order, maximizing revenues, diversifying the customer base, ensuring customers pay on time, and having a strong and independent management team in place.
“You want to ensure you’ve got a good management team in place in the office that can step in and keep things running after the sale. Being associated with a strong franchise system already provides a significant advantage.
From the buyer’s perspective, the initial focus is on the fundamentals of the business itself. Is this a good business to buy? Has it been well-run? Are there systems in place? Beyond the individual company, buyers will also closely examine the reputation and support provided by the master franchisor, and the ability to speak with other franchise owners offers invaluable insight for potential buyers.
The Walden M&A Approach to Franchise Sales
While selling a franchise involves unique considerations, Walden M&A applies its proven M&A expertise to guide clients through the process. As she explains, they approach it “as if it were a regular business… with just the patience of the elongated timeline.” Walden M&A’s experience with the intricacies of the M&A process, combined with their understanding of the additional layer a franchisor presents, allows them to effectively navigate these transactions.
For franchise owners considering their exit, partnering with an M&A firm with a robust network of vetted buyers, who understands the nuances of the franchise model and is prepared to manage the extended timelines and additional parties involved, can make the difference between a stressful, drawn-out process and a successful, rewarding sale.
Ready to Discuss Selling Your Franchise?
If you own a business-to-business franchise and are considering a sale, the experts at Walden M&A are here to guide you. We understand the unique challenges and opportunities involved in selling a franchise and are committed to helping you achieve your exit goals.
Contact Walden M&A today for a confidential consultation. Let us leverage our experience to help you navigate the process and find the right buyer for your business.
