Thinking about selling a corporate-owned outlet? This can be a daunting thought for franchisors, especially in the early years of their franchise.  Franchisors typically have a great affinity for their corporate-owned outlets, and transferring one can be like watching a child going off to college or even more, getting married.  Ok, maybe not that dramatic, but the point is that franchisors always want the buyers of their corporate-owned outlets to succeed, not just because the buyers are new franchisees in the system, but because they grew those stores, and now they are watching it “leave the nest” to hopefully become even more successful under the new franchisees’ ownership.

7 Steps for Selling to a New Franchisee

Before I get too sentimental, let’s get back to the reason for writing this article:  How do you actually sell to a new franchisee, and what are the basic steps to the sale?

Here is a basic overview of the process in seven digestible steps (but keep some Pepto Bismol handy anyway):

1. Assuming you (as the franchisor) have someone interested in purchasing the corporate-owned outlet, the first step in the transactional phase is typically providing basic due diligence documentation and/or information regarding the franchise location to the potential buyer, as well as the franchise in general (assuming they are not a current franchisee). In conjunction with providing the documentation, you will also want them to sign a non-disclosure agreement, so as to keep any information they receive confidential.
2. Typically, once the buyer has an idea of what they want to offer, they will send a “Letter of Intent”, or “Term Sheet” (same concept, just different labels) to you, with a basic outline of any terms that have either been discussed or are being proposed initially. This document is generally non-binding (except for a few clauses, such as an “exclusivity” clause, which precludes sellers from negotiating with multiple parties for a period of time while negotiating with the buyer based on their offer).
3. When the Letter of Intent is signed, generally, the next step is to have attorneys draft purchase agreements for the sale. This is typically called an “Asset Purchase Agreement” and is the primary document in the sales process.  The reason this document is so important is that, in addition to listing all the terms, both business and legal, it symbolizes the commitment both sides are entering into to close a deal. The document is also typically the most negotiated document as well, simply because it is much more detailed and lengthy compared to the Letter of Intent (to use a food analogy, the Letter of Intent is the appetizer, Purchase Agreement is the entrée, and closing of the deal, the dessert, which is usually the fun part!).
4. After the Purchase Agreement is signed, that is not the end of the process, however (just seeing if you were paying attention to the end of the previous paragraph). At this point, the parties typically set their sights on closing, but the major items to tackle from then until closing include making sure all the franchise documents, including the all-important Franchise Agreement, is presented with enough time for the franchisee to review.
5. Also, if it was not done early on in the process (which is recommended), there must be constant communication from both the franchisor and the purchase of the corporate-owned outlet, to not only vet the buyer (i.e. even if the buyer is a current franchisee landlord will still have to vet them), but also to determine whether there will be a new lease or an assignment of the existing lease (typically if there is time left, it will be an assignment of lease).
6. Another important thing to note early on in the process is whether or not the buyer is getting a bank loan to purchase the outlet (such as an SBA loan). I only mention this because it will largely determine the timing of when closing will actually happen. Lenders and landlords are typically the biggest x-factors in terms of any small business deals, not just in the case of corporate-owned franchise outlets.
7. A final note on the closing itself. It doesn’t have to be that complicated! There will be “closing” documents that will be prepared in advance, such as the “Bill of Sale”, and “Settlement Statement”, to name a few, but I always like to say the days leading up to closing are when all the work and preparing documents is done.  All closing should be is this: signing documents between the parties and distributing whatever monies are owed (in this case, to you as the “Seller”).  The focus of the closing date should actually be on the operational transition and helping the owner of the new corporate outlet get off to a flying start!

If you have any additional questions on the above or regarding these types of transactions in general, feel free to reach out to me anytime at 215-525-1165 ext 120, or you can reach me by email at [email protected].