Selling and Buying Franchise Businesses: What You Need To Know
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You’re not buying a business. You’re buying the right to run someone else’s.
That’s what a franchise is. An agreement, for a set term, to operate a business under the franchisor’s brand and rules. It can be a brilliant move. But you need to know how you’ll get OUT before you get in.
My guest is Rajiv Rajan, an experienced business broker who specialised in selling franchises for years. I’ve been a franchisee myself, in a training business, so this one’s close to home.
What you’ll learn
- How to research a franchise properly before you sign anything
- The hidden costs that catch buyers out at the last minute
- Why the timing of your lease and refurb decides your sale price
- How the franchisor’s first right of refusal works when you sell
- What to have ready before you even call a broker
Buying in: the traps
- Falling in love with the brand. Rajiv has seen buyers pay twice as much for a less profitable business, just because they loved the logo.
- Skipping paid advice. A couple of thousand dollars for a franchise-experienced lawyer and accountant, before you invest half a million, is money well spent. Your cousin “in contracts” doesn’t count.
- Only talking to the franchisees you’re given. Walk into a cross-section of stores and ask for the owner. You want the good AND the bad.
- Not reading the hours. A shopping centre café can mean seven days a week, 6am starts and weekend penalty rates.
- Wanting out too early. Six months in, there’s no goodwill to sell. You might get back a third to half of what you paid.
The cost nobody mentions
The advertised price is NOT your buying cost. On top of it come stamp duty, your lawyer, your accountant, the franchisor’s legal fees, and a bank guarantee to the landlord, often several months’ rent.
Rajiv’s rule of thumb: allow about 15% on top of the purchase price. Then keep working capital aside. The coffee machine always breaks in week one.
Selling out: get the timing right
A year left on the lease
Refurb not done. Banks lend over the remaining lease term, so buyers can’t get finance. Rajiv calls it close to a fire sale.
Fresh lease, fresh fit-out
Finish your term, do the refurb, sign the new lease. Now a buyer walks into a turnkey business. That’s when you get market value.
Before you sell, have this ready
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Four years of financial statements. Up to date, and you can explain the story behind them. Strip out one-off government payments; they’re not maintainable earnings.
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Your lease details. Term remaining, options, and any refurb obligations.
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Staff and equipment. Who transfers, what’s owed, and any equipment on lease or hire purchase.
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A word with your franchisor. Most agreements give them first right of refusal. Notify them early, and make sure any buyer you find will meet their criteria.
It’s the same story in every business, franchise or not. YOU NEED TO KNOW YOUR NUMBERS, and you need them ready before a buyer asks.
Quick questions
Where can I get free franchise advice?
Rajiv suggests the Franchise Council of Australia and, in WA, the Small Business Development Corporation. The Franchise Research Institute also has profiling tools to check whether franchising suits you at all.
Should I go straight to my bank for finance?
No. Use a commercial finance broker. They help you prepare, quietly test the lenders first, and help you avoid a decline on your credit file.
Are franchises good for entrepreneurs?
Usually not. The best franchisees follow the system. Highly entrepreneurial people tend to build their own system inside someone else’s, and that’s where it breaks.
Know your exit before you need it.
Franchise or not, my free Sale-Ready Scorecard shows how saleable your business is right now. Want to know what a buyer would pick apart? That’s the Sale-Ready Assessment.
Rather start with the basics? Try a free mini course
Build it as if you’re going to keep it forever but could sell it tomorrow.
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