Understand The Finer Details Of A Franchise Resale Strategy

Every franchisor who is new to the franchise business is interested in addressing a potential franchisee candidate. He strongly believes in his business model and looks for people that are enthused by his business model and attributes of the brand.

Persons that have managerial skills but are reluctant to dive head-on into entrepreneurship often test themselves by getting involved in a franchise. They participate in all the activities with much energy and interest. They also employ all their past learnings to scrutinize various aspects of the model.

With the passage of time, the new entrepreneurs get busy with the fixed format of business and continue to run it successfully. But soon they start realizing that a franchisor puts many constraints on them and they hardly have any freedom to make decisions. When they get used to business as usual, the routine starts to bore them. This is especially true of people with a strong spirit of entrepreneurship. They start losing motivation to continually work on improving the business.

Whenever a franchisee loses interest in the business, it stops growing. Imagine a business that has many such franchisees. In such a case, the franchisor is eager to sign on people with a more persistent interest in the business. But, how can new franchisees be introduced if there are no more locations remaining to be explored?

This is a very bleak scenario but it can be remedied if there is proper franchise resale strategy clearly outlined in the original franchise agreement. Sadly, most franchisors see such a situation in a negative light and totally fail to address it.

In the recent times, this issue is under a lot of discussions and many believe that a clear strategy is found to be extremely essential a few years down the line when getting franchisees will not be the only focus of a business. Franchisors are now advised to think about it and incorporate required clauses in the original agreement itself.

The legal document binding a franchisor and franchisee in the event of a resale becomes very essential to retaining the interests of all concerned and avoiding legal tangles in the future. The document should clarify certain points that are discussed below.

Standard selling procedure:

The agreement should mention a standard set of steps and rules to follow in a specific order when the decision to sell is taken. The first step can be to take approval for sale from the franchisor. This will bring the franchisee and the franchisor on the same page regarding the future of the franchise unit. The manual can further mention the processes of advertisement, independent valuation of the business, selection of new franchisee, various selling fees, and joining charges. It can also prescribe the format for the agreement of sale that will link the new franchisee to the franchisor.

Selection of the new franchisee candidate:

The franchisor should have the final say in whether a candidate can be approved to buy a franchise from the existing franchisee or not. If an agreement limits itself to allowing resale but does not mention such authorities, then there are high chances of an unsuitable candidate getting the franchisee.

As is mentioned as often as can be, only wealth cannot be the criteria for the selection of a franchisee. The candidate would have to prove himself on many counts such as experience, qualifications, knowledge, and personality. If need be, in certain businesses requiring particular experience and knowledge, the criteria can be mentioned explicitly. It should entirely be the franchisor’s prerogative to select or reject a prospective candidate.

The selling price of the franchise:

A franchisee that has invested a lot of time, money and effort to develop his business will want to receive profits that are proportional, by selling the franchise unit. While this is perfectly reasonable, the selling price should not be very high. If the profits from selling the franchise are very high, any of the other franchises will also be motivated to make easy money through the sale of their franchise units. A very high selling price will also dissuade clever businessmen from buying it. It would more or less surely fall into the hands of a person who has money but no business acumen.

This is a very undesirable situation because if the person is not suitable for business or does not have adequate exposure to the field, there are chances of performing badly. Such a person can even damage the brand by not meeting the standard quality that customers associate with your brand. Thus it should be clearly mentioned in the agreement that the selling price of the franchise should not go beyond a certain percentage over the original franchise fees.

Buying charges:

When a person is ready to buy a franchise business, there is an opportunity for the franchise unit owner to earn. Do not forget that the franchisor is the original owner and he also gets an opportunity to earn. It is a different matter that some franchisors charge only a small amount that will proceed towards providing training and other support that is necessary for new franchisees onboard.

Some of the entrepreneurs believe in making money if the opportunity presents itself. They charge the franchisee as well as the prospective buyer of the franchise unit. Some view this additional cost as something that will dissuade sellers as well as buyers. Whatever fees the franchisor thinks appropriate should be mentioned clearly in the document.

Exit strategy:

In addition to the points discussed above, there has to be an exit agreement between the original franchisee who wishes to sell and the franchisor. A franchisee receives a lot of product and service knowhow while working with a franchise through extensive training. They are also privy to a number of business secrets relating to marketing and sourcing. This fact leads to the risk of the know-how being used unfairly after leaving the franchise. It can become a major source of worry for the franchise that has spent years building this knowledge.

In order to protect the business interests in such a situation, the franchise declaration document has clauses that state that the franchisee cannot engage in a competitive business in the same area as the territory of the franchise that was held by him.

There will also be clauses relating to the payment of dues, fees, and charges up to a certain period of time during which the business continues. There will also be clauses relating to the lease agreement in case the property where the business is based, belongs to him.

Three party selling deed:

The process of selling a franchise by a franchisee is related to three different parties, namely, franchisor, existing franchisee, and new franchisee. The document has to bind all three in agreement. If a standard format is designed by a lawyer it could be used with the surety that it is legally binding in certain ways that are desirable to the franchisor.

Thus, it is best that a franchisor consider these changes as inevitable and consider them in legal the provisions that ensure stability to his business. The selling process should be very clearly mentioned in the manual and should also be touched upon during the initial franchise training. If the franchise is at such a stage where there are more chances of such a situation, he can organize a workshop to guide the franchisees.

A smooth transition of ownership of franchise will help all the three parties to adjust to the necessary change and resume business in a short time without any loss of market.