A franchise resale involves an existing franchisee selling their business to a new incoming franchisee, or another existing member of the network. In the same way as selling any other type of business, there are two different ways to structure a resale transaction. A share sale can be undertaken where the sellers are the individual shareholders who sell the shares in the target. The other method is a business and asset sale, where the trading company sells the goodwill, together with specific assets.
Although the process for a franchise resale is similar to selling any other business, it is important for a franchisor to be involved during the process. While the main commercial terms are negotiated between the outgoing and incoming franchisees, it is essential to structure the deal process and key documentation carefully.
1. Franchisor
The starting point for any franchise resale will be to liaise with the franchisor. Franchisors typically have different processes to deal with a resale transaction, and can often help to source purchasers for the business.
Most well-drafted franchise agreements will contain provisions regarding franchise resales, and it is key from a seller’s point of view that they do not risk breaching this agreement. If the breach is serious enough, it can result in termination of the franchise.
Examples of such provisions are the incoming franchisees, and the relevant principal(s), would need to be approved by the franchisor, or giving the franchisor a right of first refusal on the sale.
2. Process
Once engagement has been made by the seller with the franchisor, the typical order of events would be as follows:
- Agreeing the heads of terms for the transaction – this can include negotiating any confidentiality or exclusivity provisions.
- Conducting the due diligence process – this is where the seller (and their advisors) carry out appropriate legal, tax and financial due diligence on the target business.
- Obtaining third party consents – this could include banking releases, or assignments of leases for any premises and “TUPE” arrangements where this is a business and asset sale.
- Obtaining third party consents – this could include banking releases, or assignments of leases for any premises and “TUPE” arrangements where this is a business and asset sale.
Often, the franchisor will have their own lawyer appointed to act on the transaction, in addition to lawyers for the buyer and seller. In such circumstances, the franchisor’s lawyers will usually produce an initial draft of the key documentation (such as the heads of terms and the sale agreement), and generally assist with progressing the transaction.
3. Advantages of a resale transaction for an incoming franchisee
The biggest advantage for an incoming franchisee is that they acquire an existing business, with an existing client base. The buyer is also benefitting from the existing goodwill of the relevant territory, together with the general goodwill and branding provided from the franchisor.
In the same way as starting a new franchise business in a new territory, usually the franchisor will provide significant benefits, such as appropriate training and processes to turbo charge growth of the business.
How Roythornes can help
Roythornes are a significant player in the franchisor resale market. We have separate teams who act for franchisees and franchisors on resale transactions.
We regularly advise start-up franchisors to well-known national brands (including listed companies) across a wide range of different sectors.
Our franchisee resale team act on a vast range of transaction values, acting for both buyers and sellers.
Both teams have a great internal support network from the other disciplines involved in acting on such transactions, including commercial contracts, employment and commercial property support.