When listing their homes for sale, New Zealanders will do everything they can to get the best price. The same should apply when you are selling your franchise business.
The only way to ensure full value from your franchise business, in terms of capital gain, is to sell the business as a fully operating and profitable business, within a current franchise term. Any future franchisee will wish to purchase a full package without the “hurdles” of a new business. Prepare your business for sale up to 3 years ahead.
This article contains some useful hints towards maximising the attractiveness and value of your franchised business before you hit the market;
Keeping things confidential – Keep your plans to sell your franchise business confidential at least until the contract is unconditional. The last thing you want is to do is unsettle employees and customers unnecessarily as this could also have an impact on your sale price.
Involve your lawyer early on – Get your lawyer involved as early as possible. Provide them with a draft of the sale and purchase agreement prepared by the broker, so they can advise you on terms and conditions that are applicable to your particular business, that will optimise sale price, will practically consider timeframes and that are not disadvantageous to you or your business or staff while the business is on the market for sale. The Employment Relations Act 2000 imposes strict requirements on employers selling their businesses. Your lawyer will ensure the agreement contains clauses protecting you from a breach of the Act.
Brokers/Agents – An effective business broker/agent will be able to give you expert advice and practical tips on the best way to market and sell your franchise business based on their own experience. They will provide the added benefit of guiding your buyer through the due diligence phase of the sale. Talk to a broker recommended by someone in your industry or by your lawyer and consider the appointment of two brokers for wider coverage. Get clarity on commission amount and other costs you may need to pay to the broker, such as advertising costs.
Know your franchise agreement backwards – As your franchise agreement will include requirements which you must meet before you can sell, ensure you are aware of all your obligations under this agreement before you consider selling to ensure you have no surprises. Some franchise agreements require you to give the franchisor the ability to approve the form of the sale and purchase agreement or a first right to purchase the franchise business. Standard requirements include:
– Franchisor approval of the purchaser and their business experience;
– Successful completion of the Franchisor’s initial training programme by the purchaser;
– Payment of a transfer fee and all amounts owed to the Franchisor and any suppliers;
Good paperwork is a must – Ensure you have all your paperwork on hand, including any operation procedure manuals relevant to the business, and employment agreements and employment records. Most importantly, your accounts and other financial records (such as PAYE and GST returns) should be up to date. The purchaser and their accountant will want to review these records during the due diligence period. Be up to play with any apps and social media strategies you have used to keep customers loyal.
Lease – If you lease your premises make sure you have originals of all the lease documentation and that you are familiar with the landlord’s requirements for an assignment of the lease to the buyer. The landlord will usually require a statement of the assets and liabilities of the purchaser and a summary of their business experience. If the term of the lease is shorter than the term of the franchise agreement, or only has a short time before the term has expired, the purchaser often requires you to obtain landlord consent to vary the lease to extend the term or add further rights of renewal.
Purchase Price – You will need to specify the portion of your purchase price which relates to stock, tangible assets (e.g. the physical items being purchased) and which relates to intangible assets (e.g. goodwill). You should talk to your accountant before you agree on the split as this will have tax consequences for you. Consider whether or not you are prepared to offer vendor finance to a purchaser.
Be Honest – Make sure that you can back up any statements you make to a buyer or to your agent. There are considerable fines which apply under the Fair Trading Act 1989 for misleading and deceptive conduct and unsubstantiated representations.
Getting optimal results takes time and planning. The earlier you get started in preparing your franchise business for sale the better chance you will have to maximise value and the smoother process will be.
Megan Williams is a director of Steindle Williams Legal Ltd specialising in the areas of commercial law and property.