For a franchisee there are two roads to selling the existing business; the first is a sale back to the existing franchisor and the second is a sale to a third party.
The Franchise Agreement will likely include specifics for a resale and also provide for the franchisor having a right of first refusal should a third party make a purchase offer. In the case of an ultimate purchase by a third party, the franchisor will impose a “transfer fee” to be paid by the existing franchisee and will either allow an assignment of the Franchise Agreement to the new owner or may require a new agreement be executed. The franchisor, once he knows that the existing franchisee wishes to sell, may choose to buy back the franchise and then sell to a new franchisee, or even operate the unit as “company owned”.
Assuming the circumstances are that the existing franchisee pursues a sale on his own, there are ways to value the business, the most common of which are:
- Using a multiple of the business’s net earnings or free cash flow, usually 1-4 times EBITDA.
- Using a multiple of future earnings.
- Using “comps” of similar franchise sales obtained from either the franchisor or a franchise/business broker.
- Using assets of the business including the exclusive territory.
It is important to note that in certain instances, the franchisor may require that the selling franchisee assume contingent liability after the sale to a new owner. If this is the case, it cannot be stressed strongly enough that the new franchisee have sufficient assets and guarantees for the benefit of the seller going forward.
As with the sale of any business, thorough due diligence with the assistance of a trusted attorney and accountant is of paramount importance.