Tips for Selling a Franchised Business (Part 1 of 2) by Cliff Ennico on Creators.com

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Tips for Selling a Franchised Business (Part 1 of 2)

"I bought a franchise several years ago, and while I made back my initial investment, it hasn't exactly made me rich and I'm no longer that excited about running the business. Also, my husband and I want to retire and move to Florida to be closer to our grandkids. The franchisee in the territory next to ours has made us an offer to buy our territory. What are some of the things we need to think about in selling our franchise to him?"

First of all, congratulations on finding a good buyer for your territory in a difficult economy. The fact that your buyer is already part of the franchise system will make things a whole lot easier for you.

Do not even attempt to sell your business without the help of a good business lawyer and a good accountant — you will need both of these professionals to help get the paperwork done.

Here are some questions you will need to ask your lawyer:

(1) Am I in compliance with my franchise agreement? Dust off your franchise agreement and read the "assignment and transfer" section carefully. You will have to give the franchise notice of your intent to sell, and obtain their consent to the sale. If you are in default in any of your obligations under the agreement, you will have to clean these up before you will be allowed to sell. You will also be required to sign a non-compete agreement saying you won't go into a similar business in Florida for the next year to two years.

(2) Will the franchise require me to update my franchise outlet before I sell? If your franchise is a retail business and it has been a while since you have updated or upgraded your store to the franchise's current standards, you may be required to do so before you will be allowed to sell. Your buyer may agree to perform the necessary upgrades for you, but he will want to deduct the cost of doing so from the purchase price he initially offered you.

(3) Is there a "transfer fee" due to the franchise and, if so, who is responsible for paying it? Most franchises require the payment of a "transfer fee" (normally one-third to one-half of the initial fee your franchise charges new franchisees). You are required to pay this fee when you sell your territory, but you can always ask your buyer to "split" this fee with you.

(4) How do I go about transferring my existing store lease to the buyer? If you lease your franchise location, the landlord will have to approve your buyer and consent to the sale before it will allow your buyer to assume your lease.

Most landlords will require you to reimburse their legal and other expenses, and some will require your buyer to pay an additional month's security deposit. If you paid a security deposit when you first signed your lease, your buyer will have to reimburse you for that on top of the purchase price for your territory, as no landlord I know will ever return the security deposit to you until the lease expires. Also, if your closing is in the middle of the month, your buyer will have to reimburse you for rent, utilities and other payments you have already paid to the landlord for that portion of the month he will be occupying your space.

(5) If the buyer is paying for the territory in installments, how do I protect myself if he fails to make a payment on time? If your buyer is not paying the entire purchase price at the closing, you will need to obtain a promissory note from him agreeing to pay the balance in installments, with interest at a commercial rate (currently about 3 percent per annum). In addition, you should take a lien (called a "security interest") in all of the equipment and other assets you are selling him. If your buyer is a corporation or limited liability company (LLC), you should ask the buyer to personally guarantee his company's obligations to you under the promissory note.

You should also ask your attorney if you can get a "collateral assignment of management rights" from the buyer. This document would allow you to boot the buyer out of your franchise territory if he defaults under his promissory note and take over your old business again in order to protect your investment. If your attorney thinks such a document is legal in your state, make sure the franchise agrees to let you back in if it becomes necessary for you to roll up your sleeves and get back into the game again.

(6) When should I tell my employees I'm selling out? First of all, make sure that all of your employees are "at will" — they can be terminated at any time for any reason. Assuming they are, you should wait until the closing takes place, then walk over to your store with the buyer and make a joint announcement of the sale to your employees. Letting word leak out that you are planning to sell the business may cause some of your best employees to "jump ship" prematurely.

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com.

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