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A McDonald's restaurant in Alexandria, Va., July 23, 2010. (MOLLY RILEY/MOLLY RILEY/REUTERS)
A McDonald's restaurant in Alexandria, Va., July 23, 2010. (MOLLY RILEY/MOLLY RILEY/REUTERS)

Value: John Warrillow

Is a franchise business easier - or tougher - to sell? Add to ...

Buying a franchise business may be tempting because of the brand name and proven systems. But when you decide it is time to get out, will you be able to sell your franchise?

I canvassed a number of franchise experts and professionals who sell businesses for a living, and they were divided on whether a franchise was easier to sell than a standalone, independent business of a similar nature.

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Advantages

The benefits of selling a franchise business can be summarized as follows:

1. Customers are loyal to the business, not you

“When you pick up a Big Mac, you’re probably not choosing McDonald’s because you’re loyal to the owner of that franchise,” but rather to the brand itself, says Joel Libava, president of Franchise Selection Specialists Inc. in Cleveland and a specialist in helping people choose franchise businesses.

One reason most smaller businesses are hard to sell is that they are too reliant on the owner as the rainmaker. In a franchise business, at least some of the reason the customers find and return to the business is the brand the franchisor has built.

2. Buyers get an operations manual

“One of the benefits of selling a franchise is you have a system to follow, initial training and ongoing support,” says Larry Lane, owner of VR Business Brokers in McKinney, Tex. Another reason independent small businesses are typically harder to sell, on the other hand, is that the operations of the business are inside the head of the founder.

3. Buyers understand what you’re selling

Unlike an independent business, where the magic can be difficult to describe in a short ad or online posting, people know what you’re offering when you say you’re selling, say, a Canadian Tire store in Barrie, Ont.

Disadvantages

Despite all of the advantages of being part of a franchise system, there are also some unique challenges to selling a franchise:

1. Transfer fees and restrictions

Franchisors like to control and vet who they accept as franchisees, which means there is often an approval process to undergo and transfer fees to pay when a franchise unit changes hands.

Mark Andresky, principal of Performance Business Advisors in Grand Rapids, Mich., and a certified business intermediary and exit planner, explains: “Many franchisors require hefty franchise transfer fees (often many thousands of dollars) as well as fees for mandatory training of new owners. Many of these fees and requirements are buried in lengthy franchise agreements and are often a surprise to the selling franchisee.”

2. Smaller pool of buyers

Some people just don’t want to own a franchise because of the rules, restrictions and fees that put creative entrepreneurs in a box. “I have to agree with the ‘harder to sell’ folks,” says Barbara Taylor, a partner in Synergy Business Services in Fayetteville, Ark. “Franchises tend to evoke an either/or response: You either love ’em or hate ’em. In my experience, there are fewer buyers who are looking to buy an existing franchise.”

Jim Cumbee, a business broker and principal at the Tennessee Valley Group in Franklin, Tenn., adds, “A large part of selling a business is finding the right emotional connection with a prospective buyer, and I think it's easier to find that emotional connection when it's a non-franchise business.”

3. Competing with your franchisor to find a buyer

When you try to sell a franchise, you may be competing with one very large, well-financed competitor – your franchisor.

“While many franchisors tell their franchisees that they will assist in finding a buyer when the franchisee chooses to sell, my experience is that most do not offer much, if any, assistance,” Mr. Andresky says. “In fact, some franchisors are so focused on selling new franchise units in a market that they, in effect, compete with existing franchisees who desire to sell. I have also seen downward price pressure on existing franchises when multiple units are on sale in a region.”

If you’re going to buy a franchise, make sure you understand the rules for selling it down the road.

Special to The Globe and Mail

John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He writes a blog about building a valuable – sellable – company.

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