Most entrepreneurs build a business in the hope that they’ll sell it one day for a fantastic financial return. Unlike a stand-alone business where success is strongly linked to the talent of the entrepreneur, a franchise resale offers the added advantage of a recognisable brand and defined operating procedures.
When is a good time to sell? While it’s never easy to time the right moment to sell many business experts recommend at least two years of preparation before putting a franchise on the market. This includes a few years of smooth running in building up a consistent client base and also being able to produce two or three years of healthy financial results. Sell too soon and you will not get the price you want. When economic conditions are poor, it may be worth waiting it out till things improve.
For the franchisee, preparing for a sale means running the business with an eye on profitability. While many small entrepreneurs load a business with extra expenses to lower tax, this can make a business appear less profitable and cause a buyer to undervalue your business.
How much money can I expect to make?
Every business is different and the financial returns you can expect will depend on a number of factors including:
- How successful the business has been
- The stability of the cash-flow
- Whether profits are trending up or declining
- The perceived prospects for the business in the future
- The strength of the underlying franchise brand
- What assets the business owns
- The desirability of the location
- Employee calibre and level of training
- Client book including contracts with clients
- The economic climate at the time
Franchise sale conditions
Most franchise agreements contain strict conditions governing the sale of the business. This is to ensure that the franchisor has the final say over who gets to do business using the franchise brand. Typical requirements include:
- The buyer must meet the franchisor’s qualifications for new franchisees and the franchisor reserves the final right to approve the buyer as the new franchisee
- The buyer must agree with and sign the franchise agreement
- The existing franchisee must settle all outstanding franchise fees prior to the sale
- The franchisor approving the financial terms of the sale
- Payment of an initial fee by the new franchisee
Depending on the specific circumstances, these restrictions may be significant hurdles, or they may not be much of an issue at all. In most cases the franchisor will want to exercise caution with selecting the right franchisee to take over the business. If the buyer is seeking finance, the franchise will also want to ensure that the buyer can meet his/her financial obligations and will be overextended.
In other cases, the franchisor may be a potential buyer. Many franchise agreements grant right of first refusal for the franchisor to buy back the franchise. What this means is that the franchisor may step in any buy the business on the same terms offered to the third-party buyer.
Then, of course, franchisees need to be aware of their obligations when they exit the franchise system. While restraint of trade clauses are difficult to enforce in South Africa, franchisees may find themselves in hot water with both the franchisor and the new buyer should they attempt to take advantage of the customer lists and goodwill they developed while they ran the business.
Hire the dream team
Get the right advice to protect yourself and get the best price for your business. Some of the members of your team may include an accountant, a business broker and a lawyer. Know that that this expertise will cost you, but it’s important to have a good team look over your business. Make sure you ask for customer testimonials and contact details when shopping around for your team.
Questions for would-be sellers
- Why am I selling?
- What will I do when I’ve sold the business?
- Is the market right for a sale?
- Am I prepared for the work involved with selling a business?
- Who should be on my team when I sell?
- How should I market my business?
- What support will my franchisor give me when selling?
Are you looking to buy or sell an existing franchise? Ask the experts at whichfranchise.co.za for advice on getting the best deal for you.