Franchising Today - Summer 2016 - 21
SELLING A FRANCHISE
MANY FRANCHISE AGREEMENTS ARE DRAFTED TO PROVIDE THE FRANCHISOR A UNILATERAL
RIGHT TO PURCHASE A FRANCHISE.
How much MUCH
is my franchise
consider how far in the future
business worth? How much will it be
worth in a few years? How much will
it cost me to build that value? Will I be
able to get that value out of the business? Be sure to maximize the value of
your franchise when you are negotiating agreements.
Whether you are an existing franchise owner or exploring the purchase
of a franchise business, it is worth
paying close attention to whether the
franchisor has the right to repurchase
the franchised business from you.
Many franchise agreements are drafted to provide the franchisor a unilateral right to purchase a franchise at
a time in the future for some stated
price based upon a multiple of profits
or some other formula.
Therefore, you may succeed in
building a great business only to be
faced with having to sell to your franchisor for less than it's worth or for
what you have spent to build it and
make it attractive enough that the
franchisor wants to own it.
In our experience, there is usually
little or no disclosure in the franchise
disclosure documents (FDD) about the
economic impact of the franchisor's
repurchase rights. This may be a deficiency in the disclosure obligations,
but give careful thought to your longer-term business plan. Consider the
startup costs, mandatory maintenance
and improvements, the costs to achieve
projected growth and profitability and
whether you can afford to take any money out of the business along the way.
the franchisor's rights to repurchase
start, the price (or price formula) at
which you can be bought out, who
and/or what may trigger those rights
and, critically, whether you can reasonably expect to recoup your investment and expected profits by the time
you may be forced to sell.
For new prospective franchisees, do
your due diligence by talking with existing franchisees. For existing franchisees, pay close attention to this
issue as you develop or revise your
business plan for the coming years.
With all of this in mind, try to negotiate (or renegotiate) for a greater purchase price or profit multiple and a
long operation time period before the
right to purchase can be exercised.
Try to plan your exit strategy on
your terms. In addition to the franchisor's attempts to unilaterally purchase a franchise, pay close attention
to the following when negotiating
the terms of a new or renewed franchise agreement.
Pay careful attention to the defined
terms and the fees the franchisor
can collect from your franchise. The
terms in the FDD can be vague, leaving an opening for the franchisor to
charge you additional fees in the future - fees not contemplated when
the agreement was executed.
For example, if your business models and sources of revenue change
over time, make sure that when royalties and other fees are tied to certain revenue sources, those sources
are very specifically defined. Look at
older FDDs and agreements of older
franchisees in the organization that
pay different royalties or other fees.
Try to determine whether your proposed agreement contains the same
Make sure that when royalties and other
fees are tied to certain revenue sources,
those sources are specifically defined.