How Much Will You Make from the Sale of Your Franchise?

When franchise owners are exploring the idea of selling their business, they naturally have questions about the final payout amount. Many of them plan to fund their retirement through the sale, so understanding how much they might net is their primary focus.

Deciding if and when to sell a business is a very personal decision based on many factors, including age, lifestyle goals, future plans (traditional retirement or potentially going into another business), and what financial assets the seller already has. In addition to their family’s feedback on what comes after the sale, especially if they are involved in the company, the input of an owner’s tax and financial advisors is crucial to making an informed decision.

Here are the most important considerations for sellers.

The tax implications for the profit from the sale

A large part of how much the seller will retain depends on their tax status at the time of the sale. Brokers always recommend that owners consult with their accountants to get a clear picture of how much of their profit will go to taxes after the sale. Some sellers, based on this figure, decide to finance part of the sale themselves to defer income taxes for a few years. In some cases, loans from the Small Business Administration (SBA) might also require the seller to hold a note, which will reduce the profit at closing (and, therefore, the taxes due).

The fees a seller will pay at closing

This question comes up frequently. Most business owners are familiar with selling a home, which often involves many complex fees due at closing. The good news for franchise sellers is that the buyer pays almost all the fees related to the transaction, including the transfer fee, the lease assignment, the cost of upgrades to the store’s design, and processing fees. The seller is usually only responsible for three expenses: a broker’s fee (if applicable), any professional hours from their own attorney (if they used one), and part of the transaction attorney’s fee. Traditionally, the transaction attorney’s fee, which ranges from $3,000 - $5,000, is split evenly between the seller and buyer.

How much support does a seller need to make a deal

When it comes time to sell one or more franchise locations, it’s always a good idea to have some type of seller representation. For most owners, it will be the largest transaction they will ever be part of, so a DIY approach can be risky. A buyer representative will help a seller get the best price and terms and also help them avoid costly pitfalls and future liability.

Franchisors have area development managers to assist owners in selling their company. But it’s important to understand that the franchisor’s main focus is on growing the brand and selling new units. A sale could take much longer if an owner relies on this as their sole source for finding the right buyer.

Another option for a seller is to ask their business attorney to manage the sale, especially if they have already identified a buyer. The risk here is that the attorney may not have handled many deals like this and might have a long and costly learning curve. Dozens of details can trip up a deal, including an uncooperative landlord or a lack of franchisor approval.

A third option is to engage a professional business broker. Choosing someone who specializes in franchise resales can result in a faster closing and better offers and terms. They will manage the process and, most importantly, keep it confidential.

Here are the steps a professional intermediary will take on an owner’s behalf:

• Providing an expert opinion of value - A broker determines the business’s value and prepares it for sale by analyzing financials, improving value drivers, and creating a professional offering memorandum.
• Marketing - Brokers confidentially market the business and screen buyers to ensure only qualified, serious prospects receive sensitive information.
• Negotiating the deal structure - They help both parties agree on the price, terms, financing, and the details involving a change in ownership.
• Closing and transition - They guide the two parties through closing and support a smooth transition to the new owner.

A broker will ensure that all franchise requirements and specifics of the deal are handled properly and professionally.

Most owners will only sell a business once in a lifetime; no one expects them to have all the answers up front. Taking time to ask questions and understand the process will almost certainly make a big difference in how stressful - and perhaps even how profitable - the sale will be.

Jon Franz is the president of Franchise Clearly, which specializes in reselling franchise businesses.