Franchised businesses are very common in various aspects of the Green Industry, ranging from some of the biggest players in the industry to newer start-up franchises. Such names as Lawn Doctor, US Lawns, Weed Man and many others come to mind, in addition to franchise affiliates of large industry players like TruGreen and Scotts Lawn Service. Franchise business owners are like other business owners – eventually the need to sell or transfer the business will arise. Oftentimes, existing franchises can be very attractive options for business buyers, particularly when dealing with a well-known successful franchisor. Many buyers will find buying an established business preferable and less risky than a buying or launching a start-up with its accompanying start-up losses.
Selling an existing franchise is similar to selling any other business and most of the steps are the same. There are, however, some unique issues and concerns which must be addressed when selling an existing franchise.
Right off the bat, you will need to understand the franchisors attitude toward existing franchise sales. Some companies that have both company-owned and franchised units will be actively engaged in buying back franchises. Some other companies maintain a marketplace through which existing franchisees can identify people interested in acquiring an existing franchise. Some franchisors will support you through the process, others will ignore you and other swill try to make the process difficult. You probably already know which type your franchisor is from listening to other franchisees talk about their experiences.
It will be important to understand and be able to communicate exactly what the franchise agreement says about sales of franchised businesses.
Some franchise agreements have a right of first refusal in favor of the franchisor. This provision gives the franchisor to the right to match any bid for the business. These common provisions can be very problematical. First, who wants to go to the effort of considering a bid and negotiating on the purchase of a business if their bid can easily be derailed. Second, right of first refusal provisions may give the franchisor an extended period of time to consider whether to exercise the right – sixty days is pretty common. This can cause all kinds of problems since who wants to sit on an offer for sixty days. Franchisors can be encouraged to give a response more quickly and should be encouraged to do so.
All franchise agreements will provide that the franchisor will has the right to approve the transferee of a franchise. Generally, those are worded to provide that he approval can not be unreasonably withheld. However, this is still another step in the process and it is important to understand what the franchisor’s process related to approving a new franchisee is, including what documents must be submitted and what fees are involved.
The franchisor will need to provide a Uniform Franchise Offering Circular (UFOC) to the proposed franchisee and comply with applicable federal and state laws in entering into a franchise agreement.
One question that may arise is whether the franchisor will in essence transfer the existing franchise agreement with its existing provisions and term or enter into a new franchise agreement with the transferor on current forms with current provisions and a full franchise term. If the franchisor can use the most current franchise agreement with the transferee for example, it is possible that the royalty rates may be different, perhaps higher than for the existing franchisee, which would reduce the cash flow potential of the business and potentially reduce the value of the business.
Selling any business is a complicated process, but selling an existing franchise has these and other additional concerns. Understanding these issues and addressing them early in the process will help avoid uncertainty and problems later on, hopefully resulting in a quicker, cleaner transaction that meets the needs of the buyer, the seller and the franchisor.