Points of attention when selling a franchise business

If you want to sell your franchise business, you will have to deal with fiscal-legal aspects, finding a suitable buyer, valuation, emotional and family issues, and your (financial) future. Various steps will need to be taken, and different parties will be involved.

The sale of your franchise business: asking price and valuation

To offer your franchise business for sale, you will need to determine an asking price. How do you determine an asking price? You likely feel that the franchise business is worth a lot because you've put a lot of time and energy into it. A potential buyer might feel differently and may only be looking at the bottom line profitability. To determine a well-founded asking price, it is advisable to have a valuation of your franchise business conducted by an independent third party. This way, you manage expectations for yourself and for the potential buyer who will also be running the numbers. Many factors influence the value of a franchise business, including:

• Stage of life of the franchise business;
• Location of the establishment;
• Dependency on the entrepreneur for success;
• Historical performance;
• Future prospects in the industry;
• Interest rates;
• Economic trends.

Termination franchise agreement and any associated lease agreement

You may decide that you do not want to continue with your franchise business after your franchise agreement expires, regardless of whether a buyer has been found by then. In that case, it's important that you timely terminate your franchise agreement with the franchisor, taking the applicable notice period into account.

If no notice period is included in the franchise agreement, it is important to check whether the agreement is for a definite or indefinite period.

• Definite term agreement: premature termination is generally not possible, unless an acquisition candidate is found and a purchase agreement is reached. Otherwise, the franchise agreement will end on the date specified in the agreement.
• Indefinite term agreement: the agreement is generally terminable at will. However, this depends on several factors such as the length of the collaboration and the extent of investments made.

If there is a lease agreement involved, it is also essential to timely terminate this as well, adhering to the applicable notice period. If there's a sublease construction with the franchisor, this is often linked to the franchise agreement (same term or expiry date). It is advisable to terminate the lease agreement simultaneously with the franchise agreement.

Sales brochure of the franchise business

Once the valuation has been done and an asking price determined, it is time to draft a sales brochure for your franchise business. This brochure will help you convince a prospective buyer and assist them in making a decision. A sales brochure includes, among other things:

• Explanation about the franchise formula;
• Your history as an entrepreneur and the reasons for selling;
• Service area;
• Market position;
• Acquisition option(s);
• Operation;
• Prospective outlooks;
• Acquisition conditions;
• Acquisition price;
• Desired transaction date.

The sales brochure becomes part of the Precontractual Information Document (P.I.D.) which, according to the Franchise Act, must be provided to a prospective buyer. More information about the Precontractual Information Document can be found later in this document.

Non-Disclosure Agreement

Before detailed information about the franchise business and formula can be shared, a non-disclosure agreement must be signed by a prospective buyer. This document contains information about:

• The confidentiality and its purpose;
• The coverage to personnel and engaged third parties;
• Conditions regarding possible return of the provided documentation;
• Penalty clause for breaching the conditions;
• The applicable law.

It’s important to note that a prospective buyer must first be approved by the franchisor. They will assess the candidate's entrepreneurial profile and financial capability. The franchisor has an interest in ensuring that the person they may work with fits within the franchise formula.

Precontractual Information Document

The Precontractual Information Document is an addition to the sales brochure and is prepared in collaboration with the franchisor. A potential buyer receives at least four weeks to review and consider after receiving the Precontractual Information Document (stand-still period). This document contains information about:

• The formula and franchisor's details;
• The content and provision of fees;
• Investments and costs of a franchisee;
• The method and frequency of consultation;
• Revenue-related data;
• Financial matters.

Negotiation phase

It is advisable to have the negotiations guided by an independent acquisition advisor. This party is not emotionally involved in your franchise business and knows the opportunities and pitfalls of a negotiation process.

If negotiation discussions with a prospective buyer have reached an advanced stage, an intention agreement, also known as a Letter Of Intent (L.O.I.), is often signed. Here, parties agree that they aim to achieve a common goal, such as concluding a (purchase or franchise) agreement.

Purchase agreement

If negotiations are successful, meaning an agreement has been reached between buyer and seller, and the franchisor also agrees, a purchase agreement can be drafted. The purchase agreement for your franchise business is an agreement between you as the selling franchisee and the purchasing franchisee (in prospect). This document includes:

• The assets and possibly personnel being transferred;
• The acquisition price;
• The time of acquisition;
• (dissolving) Conditions surrounding the acquisition.

Franchise agreement

After the expiration of the stand-still period and reaching a purchase agreement, the franchisor will enter into a franchise agreement with the new franchisee. It is a document in which, as comprehensively as possible, it is stated:

• The form of cooperation between franchisor and franchisee;
• The duration of the cooperation between franchisor and franchisee;
• The (dissolving) conditions of the cooperation between franchisor and franchisee.

The current franchise agreement between the franchisor and you will be dissolved with due observance of the applicable conditions in the agreement concerned.

Take action

Koelewijn & Partners collaborates with various parties who can calculate a valuation for your franchise business. They also have expertise and experience with the (financial) consequences of selling franchise businesses.

If you want to know what we can do for you and your franchise business, please fill out the form at the bottom of this page, and we will contact you!