Our Dallas, TX office recently engaged two different franchise brands for reselling existing locations within the respective franchise systems. The franchise brands are from completely different industries, but have the following common characteristics:
- Both franchisors have been in business for over 30 years.
- Both franchisors have a history of incredible growth in number of units as well as average unit volume.
- Both franchisors are well-respected brands – having many times over the past several years been designated as the leader in their respective business categories by a variety of franchise ranking publications.
This is about where the similarities end! During the engagement process we became familiar with each franchisor’s procedures and personnel that support the franchisees in executing their exit strategies. And, the differences couldn’t be more pronounced!
- Provides franchisees with a “Resale Manual”, which guides the franchisee through the resale process, including checklists for Buyers and Sellers.
- Has specific qualification requirements for buyers that are clear to everyone involved in the process.
- Offers franchisees guidance on their business valuation using historical data from actual past transactions within the franchise system.
- Advises the franchisee on any décor or system upgrades that will be required during the resale process.
- Assists franchisees with marketing their resale opportunity through relationships with 3rd party business brokerage firms.
- Speaks directly with prospective buyers early in the process to reinforce the benefits of the brand and guide the potential buyer through the franchisor resale procedures.
- Will convert potential “new franchise prospects” to a resale opportunity if the resale characteristics are of interest to the buyer.
- Offers educational classes for franchisees regarding Exit Strategy Planning at their annual conventions.
- Provides flexibility with regards to training deadlines and timelines for both buyer and seller to ensure timeliness in concluding a transaction.
- Provides buyer and seller with template agreements (LOI and Purchase Agreement) to streamline negotiations, but with clarification that both parties should secure the appropriate legal advice.
- Assigns specific corporate personnel to assist franchisees throughout the process. Executive personnel available for additional consultation.
- Brokers have easy access to corporate personnel to address any issues during the process – reinforcing that the goal is to find a qualified buyer and support the exiting franchisee’s desire to sell and achieve a reasonable return on their investment.
- No guidance was offered directly by franchisor, only to emphasize their right to approve any transfer of the franchise.
- Uses the “Area Developer” system to support the “local” franchisee resale process. The franchisor did not want to assess or communicate with a prospective buyer until such time as the buyer had completed a review process with the Area Developer, and a Purchase Agreement was fully executed between buyer and seller.
- The developer would only communicate with the franchisee, not a broker. A buyer candidate could not meet the area developer prior to a one-time per month educational “seminar” regarding the franchise system.
- Prospective buyers were told that décor and equipment upgrade requirements would be enforced at some point in the very foreseeable future. However, various prospective buyers over a six-month period were told of costs ranging from $15,000 to $80,000 for the upgrades – with the stipulation that the upgrade requirements were still not final! Advertised costs to open a new franchise location range from a low investment of $100,500!
- It could take 3 – 6 months, as quoted by the area developer, for a potential buyer to be vetted and officially approved by the franchisor, at which time the buyer would still need to complete the franchisor training program prior to closing on the transaction.
Our experience in working with Franchisor B was extremely frustrating. We submitted five candidates for approval that had agreed terms with the seller. Four of the five candidates were not approved by the area developer – with no reason given for any of the four declines. One candidate had a net worth in excess of $5M, and all candidates exceeded the financial requirements for “new” franchisees as advertised by the franchisor. Two of the candidates had previous food industry experience, which happened to be the industry involved. The 5th candidate decided to terminate the transaction due to delays in the approval process. All five of the candidates were disappointed in the process, and now have a negative view of the brand. I doubt seriously they will ever be customers of the brand in the future.
During this same time period we concluded multiple transactions with Franchisor A. We submitted only one buyer candidate that was not approved by the franchisor – the finances were simply too tight for the franchisor to have comfort with the deal, and the candidate was appreciative of the professionalism shown during the review. I think it is safe to say the candidate will continue to be a fan of the brand and may at some time in the future be a viable buyer.
Now for the interesting part! Over the last 4 years, the franchisors have experienced very different results in the evolution of their business models.
The total number of domestic stores operating at the end of calendar year 2018 indicates a net growth of 21% over a four-year period. The total network wide revenue increased 23% during the same four-year period.
Total number of domestic stores operating at the end of calendar year 2018 indicates a net decline of -4% during the same four-year period. The total network wide revenue declined -5% during the same four-year period.
There can be any number of reasons why one franchisor achieves continued growth while another experience decline. I’m not suggesting that the franchise resale process is the sole reason! However, based on our experience it certainly doesn’t surprise me to see the results of these two brands.
Franchisors often use cliché terms like “We want the franchise sale to be a win – win”, or “Be in business for yourself but not by yourself”. Some franchisors validate these sentiments by the way they support their franchisees in every aspect of their business life. Unfortunately, other franchisors do damage not only to their brand but to the entire franchise industry by not living up to the very talking points by which they sell new franchises. And, selling new franchises is all some franchisors are interested in, rather than also assisting franchisees with a smooth and satisfying exit from the brand after many years of brand ownership.
Assisting franchisees with a franchise resale is the right thing to do, but also the smart thing to do. Assistance will likely result in higher resale values, which will help validate the business model for those buyers considering opening a new franchise. It’s also beneficial at times to have new energy enter the franchise brand. And often, a new owner is needed to turn a struggling location into a successful one.
Perhaps franchisors should live by the credo of “assisting a franchisee to be as happy with the franchise brand on the day they exit the business as they day they purchased the business”.
About the Author
Larry Lane is the owner of VR Business Brokers of Dallas, TX, which is part of the worldwide franchisor organization that has been servicing small to medium size privately held companies since 1979. Larry spent 21 years as an executive with FASTSIGNS International. During his tenure the company grew from 15 stores to 540 stores operating in six countries. Larry has been a franchisee in the VR Business Brokers network for the last 10 years. For more information about VR Business Brokers of Dallas, please call 214-733-8282, email firstname.lastname@example.org or visit www.vrdallas.com