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When to sell your franchise

The best time to sell your franchise business is shortly after renewing the Franchise Agreement, while you have a reasonable term left. If there is 2 years left of your franchise term without knowing the franchisors position you have little to offer a buyer.

Franchise Agreements can be for all terms from 12 months, 3 years or 10 years with options. The Code does not require the franchisor to grant any minimum term.

There is also no obligation in the Code for a franchisor to grant a further term or option to the franchisee at the end of their initial term.

There is therefore no entitlement to a franchisee at the end of their franchise term to demand a further term from the franchisor.

You should also not expect the franchisor to be co-operative if you are in default of your obligations at the time of your sale.

Selling a franchise within the first 2 or 3 years of establishing the business is likely to crystallise a loss to a franchisee while they are establishing in the business.

Most business plans provide for a return on investment (ROI) after 3 or 4 years and this also applies to a franchise. The capital costs of establishing a franchise are recouped over 2 to 3 years and in that period the franchise may only draw a minimum wage.

It is unlikely a franchisee will secure any good will or a return on their capital if they sell in the first 2 to 3 years of their term, although that will depend on the nature of the franchise.

Having up to date financial records and showing a reasonable wage drawn by the operator will go a long way to enabling the franchisee to sell its rights.

Don’t forget your lease!

The Lease term, as well as the franchise term, is critical to the value of your business. How much is left on the lease term. You may well negotiate a sale of your business only to find the landlord will not be cooperative or you have little lease term left which will greatly devalue the business.

This is a critical issue that will impact on the value of your business.

Robert Toth | Franchise Partner | Corporate & Commercial | Wisewould Mahony
p +61 3 9612 7297| f +61 3 9629 4035
[email protected] |