Reselling your franchise

John Chambers on reselling your franchise

One advantage of buying a franchise is the opportunity to build a business and then sell it on at a profit. In effect, the business can become the franchisee’s pension. Every franchise agreement issued by a franchisor that is a member of the bfa will contain provisions that allow the franchisee to sell their business. Only, however, to someone approved by the franchisor.

Most franchisors go further, and lay down some procedures for a resale, including the requirement for certain fees to be payable to the franchisor. The principle is, however, that most of the resale profits can go into the pocket of the franchisee, apart from the fees which are set out in the franchise agreement.These range from covering the costs of providing initial start-up services to the prospect, to taking a percentage of sales (usually 5-10 per cent) if the franchisor finds the prospective franchisee – since the franchisor usually has a pipeline of prospective franchisees anyway, it will often be the franchisor who introduces the prospective purchaser to the selling franchisee.

These range from covering the costs of providing initial start-up services to the prospect, to taking a percentage of sales (usually 5-10 per cent) if the franchisor finds the prospective franchisee – since the franchisor usually has a pipeline of prospective franchisees anyway, it will often be the franchisor who introduces the prospective purchaser to the selling franchisee.

These range from covering the costs of providing initial start-up services to the prospect, to taking a percentage of sales (usually 5-10 per cent) if the franchisor finds the prospective franchisee – since the franchisor usually has a pipeline of prospective franchisees anyway, it will often be the franchisor who introduces the prospective purchaser to the selling franchisee.

The franchisor may also assist in preparing the prospectus, so that the prospective purchaser can be given the relevant financial and business planning information.

Valuations vary between sectors and on the maturity of the franchise itself. Accountants often start at the ‘3 x net profits’ point, but if the business is a one-man operation, what are ‘net profits’? Again, the franchisor is in a good position to advise on valuations because they will have seen a stream of resales and so will know the ‘going rate’. Franchisors also use the multiple of earnings method, but also use a multiple of turnover, most commonly being either side of a multiple of one. In terms of numbers, some clients have seen goodwill values (the sales price less net asset value of equipment and stock and such like) varying from £50,000 up to several hundred thousand.

In terms of numbers, some clients have seen goodwill values (the sales price less net asset value of equipment and stock and such like) varying from £50,000 up to several hundred thousand.

That said, it must be stressed that there is no intrinsic value in any franchise – but what a buyer will pay for it, so make sure you work hard on building your business! Apart from the second-hand value of equipment, the value in any business is the potential profits to be generated by an existing customer base, and the prospect for future growth.

Because of the support of a franchisor, the franchisee should be in a better position to assess this ‘goodwill value’ as there should be a ready market for franchises within a particular network. This can also act as a safety net for underperforming franchisees because although there is no intrinsic value, it is often to a franchisor’s advantage to find a buyer for an underperforming franchisee’s business rather than let them go under. Not true of every franchisor, but it is becoming much more common, particularly as the banks who support franchisees – and, in particular, resales – prefer that a franchisee can exit even with a few thousand pounds rather than zero.

Having a network with a lot of resales was viewed in the old days as a bad thing – but no longer. It is now considered a good way to reward the best performing franchisees and to refresh the network with new, enthusiastic people.

If you are buying a franchise you should check whether the franchisor has a good, managed, resale process. After all, if you worked hard to build up the value of your business, this could form part of your pension and you should check that your franchisor will encourage that.

John Chambers is partner and head of franchising at Ashton KCJ Solicitors

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