The sale of franchised units often are associated with low sales, an underperforming operator, or a poor market- in essence, a failing store with an owner desperate to exit the system and a franchisor eager to bring in a new operator to save the unit and the brand reputation in the local market. Although distressed franchised units for sale exist in any franchise system, such units typically comprise only a portion of the total franchised units for sale at a given time. Other common reasons for sales of franchised units are due to franchisees seeking to exit the system to pursue other investment opportunities or prepare for retirement with no viable successor, situations where the franchisee is unwilling or unable to adapt to changes in the market or new initiatives implemented by the franchisor, a realization that the brand or owning a franchise does not meet the franchisee's expectations, or as an alternative to termination following a franchisee's breach and failure to cure such breach. Additionally, as franchising increasingly becomes attractive to investors and private equity groups as an avenue to diversify their portfolios, the likelihood that franchises will be purchased, developed, and sold prior to expiration of the franchise term also increases. The motivation for selling an operating unit drives the strategy for marketing the unit to potential buyers; however, owners-whether successful or unsuccessful operators-often lack the skills and resources to market, negotiate, and finalize the sale of a business. Owners of underperforming units anxious to sell may entertain offers from any buyer willing to purchase the unit, thus positioning the franchisor at the crossroads of a closed unit and a buyer that does not meet the criteria for new franchisees. For owners of successfully operating units, the process of selling a business may be lengthy, time-consuming, and may present challenges for owners inexperienced at valuing a business, potentially resulting in a successful unit becoming an underperforming unit due to owner fatigue with the sales process. Any of the above scenarios has the potential to lead to a transfer to a less-than-ideal candidate and subsequent churn of the unit, with the related cost to the franchisor both in transitioning to another new owner and in its overall brand reputation.1

In light of the myriad of reasons underlying the transfer of a franchise and the potential consequences of an unsuccessful transfer, franchisors may consider the benefits of a structured process whereby franchisees may exit the system by way of a formal franchise resale program. Franchise resale programs are gaining popularity in many franchise systems, and as described in detail below, these franchise resale programs can take many forms, including franchisoradministered programs or the use of specialized consultants as franchisorapproved or optional suppliers. This article explores the evolving trend in franchisor-established franchise resale programs and examines the business and legal considerations under United States and Canadian law related to such programs and the sale of franchised units. The authors also seek to promote consideration of business factors that underlie development of a strong franchise resale program tailored to the franchise system instead of utilizing business brokers that take a one-size-fits-all approach to selling franchised units.

I. Overview of Franchise Resale Programs

Most franchise agreements include conditions that must be satisfied before a franchisor will consent to a franchisee transferring its rights in the franchise agreement and franchised business to a new owner. Such conditions may include securing a buyer that satisfies certain criteria established by the franchisor, such as financial criteria and creditworthiness, training, upgrades to the unit consistent with the franchisor's then-current standards, and payment of a transfer fee, all of which are integral to a transfer to ensure uninterrupted delivery of products and services to the unit's customers. However, satisfaction of such conditions is not triggered until the franchisee requests the franchisor's consent to transfer and presents a prospective buyer for the franchisor's consideration. An established franchise resale program can provide support to franchisees seeking to exit the system at the initial stages of the sales process, beginning with selection of a buyer from a pool of qualified candidates.

To that end, a critical component of a franchise resale program is a pipeline of qualified buyers. This pipeline may be comprised of prospective franchisees that meet the franchisor's operational criteria to become a franchisee but lack the capital required to meet the initial investment for development of a new unit. The pipeline may also include entrepreneurs interested in expanding their portfolios and existing franchisees seeking to capitalize on the skills they have developed to turnaround an underperforming unit. A healthy pipeline of prospective franchisees for resale units provides immediate options to owners interested in exiting the system, regardless of whether the unit is struggling or successfully operating. But, unlike the selling franchisee or third party business brokers retained by the franchisee outside of an established franchise resale program, the franchisor or its designated administrator of the franchise resale program has access to such a pipeline.

A franchise resale program also provides access to the franchisor's resources for marketing the brand to prospective franchisees. The skills necessary to successfully operate a franchise and to successfully market for sale a franchised business are distinct. A franchisor is in the business of selling franchises, while its franchisees are in the business of operating the type of business franchised by the franchisor, thereby making the franchisor better suited to market for sale operating units. Providing franchisees access to the benefits of franchisor's strategic approach to marketing its franchises through an established franchise resale program ensures that the message conveyed to prospective buyers seeking to enter the system is consistent with the franchisor's message to prospective franchisees and targets the type of buyer that historically has demonstrated success in operating units within the franchise system.

For clarification, the franchise resale programs described in this article are distinct from simply listing units for sale with a broker. A franchise resale program is customized for the brand to maximize the return on investment of the services provided through the franchise resale program, including identifying the characteristics of franchisees that have been successful in operating in the franchise systems and targeting buyers that demonstrate similar characteristics. As noted above, franchisees are increasingly more often sophisticated business owners interested in diversifying their investment portfolios and less the once-common operator seeking to be his own boss. An established franchise resale program is an attractive value-add to a franchisee that desires the flexibility to sell its operating units if a better investment opportunity presents itself.

In addition, a franchise resale program provides a clear pathway for the buyer post-closing with respect to advertising the unit, training personnel, and growing (or in some cases rehabilitating) the brand in the market that may vary depending upon the type of unit acquired (i.e., underperforming unit versus a successful unit). This may include a different tier of advertising, personnel training services, and fee deferrals provided to the buyer of a distressed resale unit on an interim basis while such buyer invests in rebuilding the market compared to the buyer acquiring a package of multiple successful units and who is a seasoned operator, thereby requiring minimal training and advertising support during the transition. While many franchisors likely provide varying forms of resale services to franchisees seeking to sell their units, it often is not part of an established process that is applied consistently to all transfers and instead is focused primarily on distressed franchisees. Maintaining an established franchise resale program with defined pre- and postclosing paths not only improves consistency across transfers and promotes stability across operating units but also may be attractive to prospective franchisees that the franchise system has a vehicle by which the franchisee may exit the system when desired.

Footnotes

1 While churning units is damaging in any franchise system, it can cause significant damage in franchise systems where services form the basis of the system (e.g., tutoring services provided by an owner-operator to students who are required to adjust to multiple instructor changes as the franchise transfers hands again and again).

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