Purchasing a Franchise that needs to be Sold

Buying and selling a franchise is rarely, if ever, a simply task - as there are all too often a multitude of complexities, hurdles and pressures bearing down upon the parties involved.

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Although most franchisors are promoting the virtues of launching a brand new franchise, many franchisees have found their greatest success in purchasing existing franchise locations where the current owner's circumstances have necessitated that they sell. And those circumstances frequently have nothing to do with the particular franchise's operations and financial viability, but instead are largely personal, such that the current owners cannot justify maintaining their ownership stake, and must either sell the franchise outright, or alternatively bring in new business partners who most often will ultimately assume control and complete ownership of the particular franchise. And it is through the implementation of this process, with ever more franchise acquisitions, that certain franchise owners have acquired an extensive portfolio of franchises, which has proven highly profitable based on the synergies that can be realized through multi-franchise ownership (which can also lead to preferential arrangements with the franchisor, in certain circumstances).

There are many reasons and explanations that are given for a current franchise owner to look to sell their franchise, which we will look at briefly, and each has a degree of validity; nevertheless, in my professional experience, having looked at what goes on with these businesses (which actually predates my legal career and thus represents over three decades of insight), the most significant factor, and least discussed factor, is that far too many franchise owners were not cut out for the particular business. They simply wanted to own and operate their own business, and the allure of a franchised business, which was pre-structured and appeared to be designed for success, convinced them to buy into a franchise system that they were not properly suited for. And when those franchise owners look to sell their franchise locations, there tends to be a lot of untapped potential, which they were never able to capitalize upon, while savvy franchise purchaser, who actually possess the business acumen and commitment to effectively operate a franchise to its full potential, can transform what might appear to be a mid to low performing franchise into a real profit generator. However, this requires commitment and business acumen, which all too often was in short supply with many original franchise owners who feel the need to sell their franchises.

As for those other factors that lead franchise owners to sell their franchise business, this can involve personal / internal reasons and franchise / business-related challenges, which must be appropriately assessed.

A. Personal and Financial Circumstances of the Franchisee

These reasons are often independent of the franchise's performance and reflect the owner's life stage or goals:

• Retirement: The franchisee has reached retirement age or financial goals and wants to exit the business.

• Health or Family Changes: Illness, personal injury, divorce, or increased family/caregiving responsibilities make continued operation infeasible.

• Pursuing New Opportunities: The franchisee may want to pursue a new business venture, a different career, or simply be ready for a new challenge (serial entrepreneurship).

• Relocation: A need to move to a different geographic area.

• Burnout or Loss of Passion: The demanding nature of running a business leads to exhaustion or the franchisee loses interest in the product or service.

• Cashing Out: Selling the business after building it up to realize a profit and achieve financial freedom.

B. Business Performance and Viability Issues

These relate directly to the operational and financial health of the specific location or the brand as a whole, nevertheless, they must also be assessed against the commitment, ability and effort of the current owner, as there are unfortunately far too many underperforming franchise owners who should never have become franchise owners:

• Inefficient Business Structure: Although the franchise system provides a construct for the particular business, the actual internal dynamics are largely left to the individual franchise owners, such that if they lack the business aptitude to effectively structure their business operations and optimize profits, the franchise system cannot of itself overcome these critical deficiencies.

• Insufficient Capital/Cash Flow: Not having enough working capital to weather slow periods or cover unexpected expenses, leading to insolvency risk. Too many prospective franchisees believe that a franchise is a license to print cash, when that is not the case, but instead requires smart decision-making and hard work.

• Management Difficulties: The franchisee lacks the necessary skills, experience, or commitment to successfully manage staff, finances, and/or day-to-day operations.

• Poor Location Performance: The specific franchise location is performing poorly, failing to attract enough customers, or is in an unfavorable market.

• Market Saturation/Increased Competition: Too many competing outlets (from the same brand or others) in the operating territory.

C. Franchise System and Relationship Challenges

The significance of the franchisor-franchisee relationship is of critical importance, with each parties contribution to the success of the individual franchise, and the franchise system as a whole, needing to be properly assessed from the perspective of the purchaser: 

• Where there are actual issues with the franchise system, that is not something that can be overcome by a single franchise owner, and should dissuade a potential buyer from acquiring any franchise location. However, where the current franchise owner has a bad working relationship with the franchisor, that is oftentimes an opportunity for a buyer to acquire that particular franchise location, so as to effectively relieve that owner of their acrimonious business relationship, and most often an underperforming franchise location. These franchise owners all too often get into disputes over the franchise arrangement as they wish to blame the franchisor for their location's under performance, yet when it is due to their own lack of commitment and effort, this can be a solid acquisition opportunity, especially with most franchisors looking to extricate themselves from these underperforming and hostile franchise owners.

The financial opportunity that is presented by franchise owners feeling compelled to sell can be considerable for the franchise purchaser, especially where you look to optimize the business acquisition, working with the right group of professionals, to put yourself in the optimal position moving forward.

Christopher Neufeld is a business lawyer knowledgeable in the rigors and challenges of the franchise business, together with the legal constructs that are critical to their effective operation. For experienced legal representation in starting, acquiring / selling, operating and managing a franchise, contact franchisee lawyer Christopher Neufeld at strong>403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.