How to sell a franchise business in Australia

The sale of a franchise business is a completely different procedure compared to the sale of a normal independent business and making mistakes will see you lose out on precious months, not to mention potentially tens of thousands of dollars. The franchisee needs to obtain the approval of the franchisor for his new owner. There are certain things that they cannot and can do, based on the franchise agreement. Lease, territory, branding, and Franchising Code of Conduct requirements result in a list of steps that are not part of a standard business sale.

If you would like advice from a professional with many years’ experience in the franchise sector, Benchmark’s expert franchise sales team can provide you with the facts and figures on your franchise value and time to sale.

Getting your franchise ready before it goes to market

Almost all franchise owners contemplate a sale well in advance of going on the market. Those who get better outcomes take advantage of the time they have and prepare. Preparing for a sale is easier when dealing with a franchise, as compared to an independent business. This is due to the fact that, as far as your purchaser is concerned, they have to make you happy, as well as the franchisor.

Financial records buyers will expect to see

As a minimum, two to three years of profit and loss, BAS, tax returns, and a balance sheet should be available before a prospective buyer makes initial contact. Include your POS or reporting data as well if the franchise is using the franchisor’s systems. This helps to establish your sales growth trends, which are hard to refute in comparison to manual calculations.

Potential franchise buyers are sensitive to the ratio of revenue controlled by you versus the franchisor’s revenue, which you are paying royalties for. For example, if 80% of your revenue is due to traffic generated by the national marketing activities of the franchise brand, a potential buyer considers this very differently compared to revenue you generate yourself locally. Be sure to include all payments towards marketing funds, royalty fees, and any other costs that you pay to the franchisor. These lower your bottom-line profits, and buyers know this.

If you have been treating personal expenses as business expenses, consult your accountant regarding how to prepare a ‘normalised’ figure. Add backs are expected, but must be legitimate and substantiated by documentation. Adjustments without clear documentation raise suspicions, and suspicion costs you money.

Reviewing your franchise agreement for exit conditions

The franchise agreement determines who you can sell to and under what circumstances. Prior to listing, make sure you know what is written in your franchise agreement or consult with a franchise attorney to determine its content. The first item to look for is the transfer clause. This clause details the terms that must be met before the franchisor agrees to a transfer, which usually involves the right of first refusal.

Take into consideration the remaining time on your agreement. A franchise with 18 months remaining from a five-year period is not worth nearly as much as one that still has four years left, due to the amount of uncertainty involved. Sometimes there is an option to renew in your franchise agreement, and the ability to automatically renew versus leaving it at the discretion of the franchisor changes everything.

Look for limitations regarding who you are able to sell your business to. Some franchise agreements stipulate that buyers must meet certain financial requirements and go through training programs, and some also require previous experience in the industry. Knowing such limitations early on helps prevent you from wasting time on someone the franchisor won’t accept.

Fixing operational issues that reduce sale price

A clean-running franchise will sell quicker and at a higher price than one that isn’t operating optimally. If the visual appeal of your store or equipment has deteriorated or requires fixing, make sure to address this issue beforehand. Similarly, if there are any pending compliance issues, it is imperative that you sort these out to ensure that the franchisor has no reason not to approve the transfer.

The issue of staffing is another crucial consideration for a smooth exit. If you are putting in long hours because you have failed to hire a replacement for a leaving manager, then potential buyers will realise how reliant your business is on you. This is a major risk factor, and your price will be reduced according to risk levels. You need to get your employees to the stage where you can leave your business without having to worry about its operations. Starting this work early is one of the most practical steps in exit planning for your business.

How franchise valuations work

A franchise business is not valued like an independent one, and most of the time, the owner of the franchise will overvalue it. This may be influenced by the name and system, but also the territory.

What drives the value of a franchise vs an independent business

The value of an independent business is determined primarily by earnings and assets, adjusted for the risk factor in its cash flow. When valuing a franchise, there are several factors that can either increase or decrease its value.

On the one hand, a well-established brand name and high consumer demand tend to decrease the risks for the purchaser. Franchises are easier to finance due to the relatively low risk of failures. In other words, when entering into the known system of operations and supply channels and receiving the necessary support from the franchise operator, the buyer buys certainty, which costs money.

On the other hand, the limitations imposed by the franchising agreement make it difficult for the buyer to act freely. The buyer will not be able to rebrand the business or switch to another supplier, enter into a new geographic market without permission, pay royalties and marketing fees, decreasing net profits. While an independent owner can enjoy his or her $180,000 of net profit, the franchisee who earns the same amount should consider 6% royalties and 2% marketing fees earned on $900,000 turnover.

Restriction of territories also has an influence on value. The value of an exclusive territory which has strong demographics with low competition among franchises in this particular area will be higher than the value of the territory which is split into too many sections. If the franchisor has opened up two franchises within five kilometres of your own location in the last two years, then it will definitely impact the offer made by the buyer.

The remaining number of years in the franchise agreement plays one of the most important roles when it comes to valuing a franchise. A franchise that has eight years left on the agreement is a totally different scenario compared to a franchise that has only two years left on the agreement. The buyer will purchase a license to run that franchise for a specified period of time. Understanding these factors in detail is covered in our guide on how to value a franchise business.

Benchmark has successfully negotiated more than 5,000 business deals involving both franchise transfers and independent business sales. In each case, the trends have been the same. Franchises that feature lengthy contract durations, along with unique territories in brand networks with robust performance track records, sell for a higher price than their independent equivalents in the same industry.

When your franchise is worth more to a specific buyer

Not all buyers may evaluate the value of the franchise business equally. For example, a novice investor considering entry into the franchise business may value the business based on the multiple of earnings and the price paid for other franchises. Conversely, an experienced businessperson operating several units within the franchise business that wishes to purchase your franchise territory will be willing to pay a premium price.

This is because the acquisition of your franchise will bridge a geographical void within the existing business network. The new investor already possesses a management framework and staffing structure. Furthermore, they enjoy a solid working relationship with the franchising company. This implies that the marginal cost of acquiring your business unit will be relatively low compared to starting the business from scratch. Consequently, his/her investment will yield greater returns.

Similarly, a potential buyer from outside the franchised business may pay a premium price for your business territory. The investor will see your business as a faster route to market penetration compared to establishing its presence through starting its own outlets. Therefore, the new investor will not only be acquiring the business’ revenue stream but also its customer base and leasing agreements.

Benchmark’s national database of buyers includes over 500,000 active buyers from all states and industries. When we offer our clients’ franchises for sale, we pinpoint not only potential multi-unit operators and nearby franchisees that will want to pay premium prices for the particular franchise location, but also external acquirers that see your business as a valuable acquisition opportunity. Sometimes the margin of finding the right buyer over simply any buyer can mean $50,000 to $200,000 extra in the deal price.

The franchisor approval process under the Franchising Code of Conduct

All franchise transfers in Australia are required to conform with the Franchising Code of Conduct, which is an industrial code that must be complied with under the Competition and Consumer Act 2010. This Code bestows upon the franchisor certain rights as far as entry into its system is concerned.

Right of first refusal and how to manage it

Typically, most franchises come with a clause for right of first refusal. The implication here is that once you agree on a purchase price with the potential buyer, the franchisor can intervene and make an offer to buy the franchise under the same conditions.

The good news is that this scenario rarely happens since franchisors usually don’t take interest in owning specific businesses. But there are situations where they may be interested in buying certain locations. For example, if you are selling a high-profile or high-revenue earning outlet, expect a possibility of franchisors making a counter-offer.

To deal with the issue, you should be clear about the value of the franchise by conducting a professional business valuation and getting an official written offer from a legitimate buyer. Next, simply give the offer to the franchisor following due process, and they will match everything you offer if they want the franchise. It is essential to note that franchisors are supposed to accept all the terms, including financial arrangements, as stipulated. A professional business valuation gives you defensible pricing evidence to support this process.

Consent timelines and what happens if the franchisor does not respond

In accordance with the provisions of the Franchising Code, the franchisor must respond to your application for the consent to assign within 42 days. If the franchisor denies the consent to assign, the reasons provided must be reasonable and should be set out in writing by the franchisor.

In case of failure of the franchisor to respond within the stipulated 42 days, the refusal is considered consent to assign. The deemed consent to assign clause included in the Franchising Code is intended to prevent the franchisor from ignoring any requests to transfer. Nevertheless, you will definitely find yourself at a disadvantage if you decide to use deemed consent. This may result in conflict with the franchisor and complications with getting the new franchisee onboarded. In order to avoid these consequences, it would be more beneficial to get the franchisor on board before finding the buyer.

Unreasonable refusal of consent is a common issue that many franchises face. In case you consider that the franchisor unjustifiably refuses to give consent, there is something that you can do according to the Code, and one of these things is getting mediation by the Office of the Franchising Mediation Adviser. A professional franchise broker would always be aware of any problems with consent.

Transfer fees and other costs the franchisor can charge

Franchise agreements will typically include a clause requiring a transfer fee in exchange for a change in ownership of the business. Transfer fees vary greatly. In some cases, the fee can be an amount anywhere between $5,000 to $10,000. The franchisor can also ask for a percentage, often up to 5%, of the purchase price. Others have no such fees.

There will also be other expenses incurred during the process of transfer, including any cost for initial training, installation of a new sign for the business, refurbishing the store as per brand guidelines, or purchasing new equipment. These are expenses usually borne by the purchaser but still form part of your selling costs. If you know a buyer needs to pay $40,000 to refit the store within six months of settlement, then that is effectively reducing their offer by $40,000.

These costs are critical in determining your sales price and should be known well before you even try to sell. Make sure your broker is aware of these so that he can incorporate them into your selling strategy. You will also want to know what capital gains taxes might be due.

Finding qualified buyers for your franchise

Locating a prospective buyer for your franchise may only be part of the problem. The prospective buyer should not only have the intention to buy but should also be acceptable to both the franchisor and the landlord, with adequate finances to afford the transaction.

Where to list and how to reach active buyers

The best buyers for a franchise do not necessarily come through a listing. Rather, they are sourced via targeted marketing initiatives. The multi-unit operators, as well as those already in touch with a broker that maintains a national buyer database, will almost always be more interested in the purchase of your franchise business than the casual browser viewing a listing late on a Tuesday evening. It is in this area that a franchised business can truly benefit from the skills of a brokerage company specialising in franchise sales. Benchmark’s buyer database has over 500,000 buyers registered. Our brokers match up franchise listings based on the buyers’ interest in certain brand names and geographic location within an industry. You can browse current franchise businesses for sale on our website to see how these listings are presented.

Screening buyers before the franchisor gets involved

Before introducing your prospective buyer to the franchisor, ensure they are reputable. What this entails is that you need to know that the potential buyer has enough finances to close the deal (proof of funds or pre-approved by a lending institution) and that they understand the business concept and operations. Furthermore, you must also feel confident that they will pass the franchisor’s due diligence requirements prior to the introduction.

Presenting an unqualified buyer to the franchisor means a waste of time on both ends, not to mention that you will lose credibility within the franchise system. If, for instance, the franchisor turns down two or three buyers one after the other due to lack of qualification requirements, then it clearly shows that you (as the agent/broker) have not done a good job qualifying these prospects.

The due diligence and negotiation process

When you have reached an agreement regarding the buyer’s intention and price, the negotiation enters the stage called “due diligence.” This is the time when the buyer’s lawyer and accountant take apart your company to confirm the accuracy of the information you have provided.

What buyers will scrutinise during due diligence

The purchasers and their consultants will comb your accounts for discrepancies. They’ll verify the consistency of BAS results against profit and loss records. They’ll investigate whether your sales trend is upward or downward, and if so, to what degree. They’ll analyse your employee expenses versus your income, as well as rent expenses compared to your turnover. Your payments via cash or credit card will be another point of analysis.

Also, your franchise agreement will be studied thoroughly. Is your remaining period sufficient, and what royalties do you pay? Does your agreement include a marketing fund, and if so, how much is paid? What disputes or violations are pending, if any? Has there been any breach notice served by your franchisor in the last two years? These are just some of the things that the purchaser will be asking about, and if you can provide answers quickly and effectively, it will make the process smoother.

Financials aside, you can be expected to answer questions about your lease terms (how much term remains, what options you have, rent reviews, and the permitted-use clause) and your employees (what awards they are entitled to, their leave accruals, and any outstanding claims against them). You will also be asked to provide details about your machinery: whether it is owned or rented, its age, condition, and warranty status. Due diligence for the sale of a franchise usually takes four to six weeks.

Lease assignment and landlord approval

One of the most overlooked aspects of a franchise sale is the lease, yet it is one of the leading causes of failed sales transactions. If your franchise operates out of a premises, then the buyer will need to assume your lease. For that, you will need permission from your landlord; however, he is not required by law to provide such permission.

First, examine the lease terms to determine whether there is any assignment provision within. In many cases, commercial leases have provisions allowing for assignment with the landlord’s consent, which he cannot unreasonably withhold according to most states’ commercial tenancy laws. The caveat here is “cannot reasonably withhold,” which does leave some leeway for your landlord. They will want to know the buyer’s financial status and franchising experience, among other things.

With two years or less left on your lease without an extension available, this can be quite problematic. It’s hard to justify paying the full price for a franchise when it will be gone within 18 months from the time of purchase. Ideally, you should secure a new lease or use the option to extend your current lease prior to putting your business up for sale. This gives buyers reassurance, and therefore, they are willing to offer more money for your business. We cover the full process and legal considerations in our guide to selling a business with a lease.

The timing of this is crucial. Assigning the lease could take up to four to eight weeks, depending on the landlord and the solicitor. Consider this time frame in planning how long you need to settle and ensure that both processes take place concurrently and not consecutively.

Negotiating sale terms without leaving value on the table

Price is not the sole consideration in the negotiation process. The date of settlement, training period, valuation approach for stock, restraint of trade provisions, and the inclusion of other assets in the sale, such as equipment, fit-out, intellectual property rights, and stock on valuation, must all be negotiated.

One mistake that many franchise owners make during the sale process is becoming overly focused on the total purchase price and negotiating themselves into a less than favourable position with regards to the other key considerations in the sale. This may include agreeing to provide a three-month free training period when the industry standard is between two and four weeks. It may also involve agreeing to evaluate stock at cost, even though your stock contains slow-moving inventory that the purchaser does not want. A further example is agreeing to a wide restraint of trade that prevents you from participating in your industry for five years within an entire state.

These concessions are all valuable to the purchaser, and each one carries a dollar amount. An experienced broker understands the value of the various aspects of the deal and works to ensure that they are protected during the negotiations.

Settlement and handover

This is the stage when the transaction becomes final but also becomes subject to failure. It is important for the seller to remain organised and alert at this stage.

What happens between accepted offer and settlement day

After your due diligence and any conditions contained in the sales agreement (finance, franchisor approval, landlord approval, or whatever special conditions exist) are fulfilled, it comes time for settlement of the sale. All of the legal formalities will be conducted by you and the buyer’s solicitors, including the assignment of the business name, assignment of contracts, adjustment of outgoings (which includes rent, utilities, insurances, and prepayments), and preparing the settlement papers.

The stock is usually counted and valued on the day of settlement. Make sure you know what valuations are going to be used: cost price, wholesale price, discounting of older stock, or perhaps some combination. Do not let there be any last-minute arguments about stock valuation.

It is important that the finance arrangements for the buyer be sorted out prior to settlement. The finance people may have their own terms and conditions which must be fulfilled. Keep in touch with the buyer’s broker or solicitor to ensure they are not holding up the process.

Training the new franchisee and post-sale obligations

The process of selling a franchise will normally include a training and handover period where the existing franchise owner trains the new franchise owner to run the business. It could take between one to four weeks, based on the type of franchise, its complexity, and the experience of the purchaser. Normally, this is included in the franchise agreement or purchase agreement.

Take this opportunity to acquaint the purchaser with the key staff members, suppliers, and key clients. Introduce them to your routine activities on a day-to-day and week-to-week basis, including monthly tasks required in order to keep things working smoothly in your business. Introduce your internal procedures such as what supplier treats you preferentially, and how you cope with your busiest time of day.

You may also have other responsibilities in relation to restraint of trade. It is standard practice in all business sales that prevents you from setting up a competing business for an agreed period of time within a certain geographic region. Negotiate the terms of the restraint before purchasing the property.

Why selling a franchise is different from selling a standard business

If you have previously been involved in buying or selling an independent business, or if you are discussing such transactions with friends who have, you will recognise similarities and differences in the process of selling a franchise business. Being aware of the differences helps prevent errors that can be expensive.

The most significant distinction involves the role of the franchisor. While in a normal business sale, you sell to a buyer whom you select or negotiate with until you reach a mutually satisfactory agreement, in a franchise business sale, the franchisor acts as a third party in the transaction. They have the power to accept or reject the buyer, impose conditions for transferring the business, charge fees, and even demand certain standards from the new owner.

The second major distinction is that of the franchise agreement. An independent business owner is selling out his business, which comes complete with all assets, goodwill, and the ability to run it in whatever way he wishes to. In a franchise sale, what is being transferred is the license to conduct business under another company’s brand name, and for a certain period of time, while adhering to the other party’s terms and conditions. The buyer is purchasing an opportunity to keep his business going, based on the terms and conditions set out by the franchisor. Our article on buying a franchise covers what buyers should consider before entering a franchise system.

Even the valuation process varies. For example, an independent business earning $200,000 per year can be valued at 2.5 times its earnings. However, the same franchise can earn more or less based on brand recognition, contract duration, geography, and the history of the company in terms of selling its businesses to others. It helps to have some understanding about the valuation process for net profit multiples, but it does not apply equally to both franchises and independent businesses. We work with franchise and independent businesses daily, so we understand the difference between valuations of these types of companies. Multiples are not equal and using the wrong multiple to value your franchise can be one of the quickest ways to fail on your investment.

Even the legal process will differ. Sales that take place in the normal course of business follow the general laws of contracts and state laws. The sale of franchises is regulated by the Franchising Code of Conduct, and it has some extra stipulations concerning disclosure and consent. Your lawyer should have experience with franchising law, not merely commercial law in general.

Talk to a franchise sales specialist at Benchmark

Benchmark Business Sales has been selling franchises throughout Australia since 1999. With our 50+ dedicated brokers based in six branches located in five different states, we have sold over 5,000 businesses in every major franchise system and across all industries.

When you start considering selling your franchise, the first thing you will need to do is determine its worth and how long it would take before selling your business. We provide you with a totally confidential, obligation-free consultation with a broker specialising in buying and selling your franchise business within your local area.

Call us on 1300 BENCHMARK or request a free franchise valuation online to get started.

FAQs

How long does it take to sell a franchise business in Australia?

The average length for a typical franchise sale ranges anywhere between four and eight months from the moment of listing until closing. There are additional delays involved in the franchisor approval process and the assignment of the lease that are not seen in a regular business sale. Franchises that have their accounts organised well, together with long-term agreements, can be sold relatively quickly when the franchisors work cooperatively. For a broader look at sale timelines across all business types, see our article on how long it takes to sell a business.

Do I need a broker to sell my franchise or can I sell it privately?

You can sell it yourself, however, selling a franchise is more difficult compared to regular business sales due to franchisee authorisation, customer selection, and adherence to the Franchising Code. You need an expert broker who knows how to sell franchises, as they would be aware of these steps involved and will have a broader network of buyers, which leads to the sale at a premium price.

Can a franchisor refuse to let me sell?

The franchisor has the right to refuse consent for a transfer, however, only if they have legitimate reasons for doing so. As per the provisions in the Franchising Code of Conduct, the franchisor should give you their reasons in writing. In case you think that their reasons for refusing are unreasonable, then you may seek mediation via the Office of the Franchising Mediation Adviser. Having a well-informed broker ensures that there is less chance of refusal.

What fees will I pay when selling a franchise?

You should expect a transfer fee from the franchisor (ranging from $5,000-$15,000 or a percentage of the sale price), legal fees paid to your lawyer ($2,000-$5,000), brokerage fees (usually between 8%-12%, depending on how much the smaller franchise is worth), as well as possible accounting fees for compiling financial records. Know your expenses before listing the property, so you have realistic expectations about pricing.

What happens to my lease when the franchise is sold?

The lease becomes the responsibility of the buyer after obtaining permission from the landlord. In the evaluation of the buyer by the landlord, consideration is taken into account regarding whether the buyer can afford the rent. If the lease agreement expires sooner rather than later, there may be difficulties. Where possible, extend the lease prior to selling.

How do I sell my franchise if it is not currently profitable?

This will be more difficult but by no means impossible. There may be a way to sell a franchise that is not making money if it is located in a good spot, has a valuable brand name, the term of the deal is long, and a buyer can see their way to turning it into a profitable business. Prices must reflect reality. There are some instances where the value of the sale will revolve around the value of the lease and fit-out in addition to the franchise area, as opposed to being based on profit multiples.