By Jania Bailey
CEO, FranNet, LLC

Every franchisor should have a resale program in place. If you don’t have a resale program, you need to put one in place as soon as possible. Even if you’re an emerging franchisor who’s focused on initial sales, consider creating a resale program now so that it becomes a part of your culture. An effective resale program can be used during the sales process and is often weighed by prospects in their search for a franchise system. If you leave the matter of resales in the hands of franchisees, you’re asking for complications. 

There are several reasons that people decide to sell their franchise: health issues, family dynamics, death, bankruptcy, not being happy with the system, retirement, etc. If you’re a young franchisor, you may have some the early franchisees who want out of the system. It may be that they’re not happy, not making money, working more than they had planned, or other reasons. Let’s all be honest, there were some early sales that weren’t the best fit for your system. Every new franchisor is anxious to get some franchisees on board and isn’t as picky as they should be at the beginning.

Creating an effective program

A resale program will ensure that you’re involved and have control of who joins your system. If you leave the matter in the hands of the franchisee, they’ll sell to anyone willing to pay the asking price. Most franchisors reserve the right to first refusal in terms of the sale and all franchisors should reserve the right to approve the buyer, as the franchisor will be supporting this new franchisee. 

The foundation of a solid resale program is open communication with your franchisees. The franchisee must feel safe in talking with the franchisor about their thoughts regarding selling. In your documented resale process, you should outline each franchisee’s first point of contact if they’re considering selling. This person can help talk them through the process and evaluate their options. If they wait too long to make the decision, it can mean a smaller sales price.

Most mature franchisors will have around seven to-10 per cent of their network for sale at any one time. The sale of a franchise should be viewed as an opportunity to make the entire system stronger. Active franchisor involvement from the beginning of the process is key for a smooth transition. Almost everyone who wants to buy a franchise will at some point want to sell it and, in most cases, a new motivated franchisee is a benefit to the franchisor.

There are several things that must be considered when outlining a resale program for your brand. 

• You must include any fees charged in connection to resales in Item 6 of your Franchise Disclosure Document (FDD) (i.e., commission to the franchisor)
• The transfer provisions of the franchise agreement must address any fee/commission for finding a buyer and participating in the sales process (in addition to the standard transfer fee).
• Agreements with broker/referral groups need to address resales. How will the broker be paid if they deliver a buyer for a resale? 
  • If you’re interested in working with referral/broker groups, the matter of resales must be addressed. Most referral/broker groups require that they get paid if a registered client stumbles across a resale while doing validation during the due diligence process. Without a prior agreement with the selling franchisee, the franchisor can have the expense of the commission with no way to recoup the fee.
• Will the buyer assume the existing franchise agreement or enter into a new agreement?
  • If you choose to have the buyer sign a new agreement, consider executing a mutual termination and release agreement with the seller.

You’ll want to sit down with your attorney and discuss all the legal parameters that must be defined. 

Once you decide to put a resale program in place, you must decide how involved you intend to be with the process. At a minimum, you must disclose the prospect. You’re responsible for the delivery of the FDD and License Agreement. You must decide if you’ll have the prospect attend Discovery Day. It’s highly recommended that you get to know the potential franchisee by following the same basic process as someone buying a new territory or location. 

Additional items that you should consider:

• Be sure you have a statement from the seller with a price and any contingencies that would prohibit the sale of the business.
• How will you market the business and who pays for the marketing?
•   Who will be the point of contact for the buyer?

Speaking from experience

While serving as a regional director for Fantastic Sam’s, we put together an entire resale package for our franchisees. The package started with a Resale Checklist that covered all the initial information that we needed in order to work with a franchisee on a resale. One of the items that we required was a letter from the franchisee indicating the reason for the sale. This letter was provided to the potential buyers. We required a list of ongoing obligations such as real estate lease, lease on equipment, and lease on a credit card machine. We also required copies of any notes or loans outstanding with total amounts owed and the terms of the loans. The idea was to be sure there were no surprises at the last minute.

Another part of the resale package was a “to-do” list that outlined all the steps that must take place before a transfer would be approved. This set the expectation for each party during the resale process: franchisor, franchisee, and potential buyer.   

In summary, as a franchisor, your singular goal is to strengthen the system with the right franchisees.   Having a resale program in place that helps existing franchisees exit with grace and ensures the addition of productive new franchisees is a win-win. Most franchisors have a standard sales process including lead generation, lead qualification, and methods for determining if the candidate is the right fit for the franchise system and business model. Why not extend that expertise to resales? Always remember, happy successful franchisees make the best validators!