In early 2024, FBA attended the International Franchise Association’s (IFA) Annual Conference. There we sat in on a session on franchise resales. 

The notes and insights we collected from leading franchisors were positioned to be used to help franchise systems improve their resale programs and ways to support franchisees. 

However, we thought this information would be useful for someone interested in becoming a franchise owner for you to know the challenges and struggles that franchises face, in addition to strategies they have for overcoming those challenges.

So this piece helps you to see what GOOD franchises do to help their franchisees and it’s a very real article that handles when people are done with the system, or are struggling, and gives them options for their exit in the most supportive way.

We hope this empowers you as a franchise buyer to not only assess getting into a franchise, but also understand how you will be supported in any franchise you work with.

What is a Resale Franchise?

A resale franchise is an existing franchise business that is being sold by the current owner. Potential franchise buyers often approach resales from two perspectives: either they are looking to buy an established business or they want to understand the exit strategy options available should they decide to sell their franchise in the future. Starting with the end in mind is crucial when considering any franchise investment. We’ll touch more on that later.

Franchise resales offer the advantage of acquiring a business with an established customer base, proven cash flow, and operational systems already in place. This can significantly reduce the risk and uncertainty compared to starting a new franchise from scratch.

Why Do People Sell Their Franchises?

People sell their franchises for a variety of reasons, often tied to their personal or professional goals. Some franchise owners may wish to retire, pursue new business ventures, or relocate. Others might seek to capitalize on the business’s success by selling at a peak time. Franchising, in general, makes it easier to enter and exit a business due to the brand reputation, system, and support provided by the franchisor. This visibility allows both new and resale buyers to come into business ownership with a clear understanding of what the business will look like.

Franchisors play a crucial role in supporting both the entry and exit processes. In the session we attended, we heard countless franchisors discuss ways they seek to improve their systems to provide better support and performance for franchise owners. Here are some of the key points from our notes:

• Develop Programs that Incentivize Desired Behavior: Franchisors can create programs that reward franchisees for achieving certain performance metrics, fostering a culture of excellence.
• Performance Tracking: Franchisors often track franchisee performance using a mix of brand engagement metrics (40%) and operational performance (60%).
• Grading Systems: Some franchisors use a grading scale (A, B, C, D, F) to evaluate franchisee performance. This system helps franchisees understand their standing and identify areas for improvement without comparing themselves to neighboring franchisees.
• Support Opportunities: Regular performance assessments provide franchisors with data to support franchisees in improving their operations, ensuring continuous growth and success.

The Benefits of Performance Tracking in Franchising

One of the standout features of a good franchising system is its ability to track and support franchisee performance. Just like in school, having a grading system allows franchisees to see how they compare to others and how their performance compares to their previous performance. This measure gives them a clear path to improvement and helps them achieve the results they initially sought when they entered the business.

Franchisors often set up programs that incentivize the behavior they want to see, such as giving “A” operators a larger share of rebates. These programs encourage franchisees to strive for excellence and reward them for their efforts. This approach not only helps in improving individual franchisee performance but also elevates the entire franchise system.

Having access to performance metrics is invaluable for franchisees. It allows them to get ahead of any potential problems and make informed decisions about their business. The goal of selling a resale franchise is not to escape a bad business—rather, it is about transitioning at the right time with the support of a franchisor who can spot and address issues before they become significant problems.

The structured support from franchisors, including regular performance evaluations and targeted improvement strategies, is a major advantage of franchising. This eliminates the guesswork for franchisees, providing them with clear guidance and the tools they need to succeed. By partnering with a franchisor who actively helps you see what’s working and what isn’t, you are better positioned to achieve your business goals and maximize your potential.

Begin with the End in Mind

When considering a franchise investment, it’s essential to start with the end in mind. Understanding your long-term goals and exit strategy is crucial for making informed decisions. Whether you plan to own the franchise for a few years or a lifetime, knowing how you intend to exit can shape your approach to managing and growing the business.

Starting with the end in mind involves several key considerations:

• Exit Strategy: Determine how you want to leave the business when the time comes. This could involve selling the franchise, passing it on to family members, or transitioning to a different role within the franchise system. Having a clear exit strategy helps you make decisions that align with your long-term objectives.
• Business Growth: Focus on building a strong, sustainable business that will be attractive to potential buyers when you decide to sell. This includes maintaining good financial health, fostering customer loyalty, and ensuring operational excellence.
• Resale Potential: Evaluate the resale potential of the franchise. Look for franchises with strong brand recognition, solid financial performance, and a proven track record of successful resales. These factors will make it easier to sell the franchise when you’re ready to exit.

FBA has resale programs that make this process easier. 

Ensuring a Good Fit for Both Franchisee and Franchisor

When you are assessing if a franchise is a good fit, the franchisor and system are also assessing if you are a good fit for them. This mutual evaluation process is crucial for both parties. Franchisors often ask the question, “Who do we want to be with as an operations team?” during their meetings with potential franchisees. This question is directly tied to the idea of beginning with the end in mind—both parties need to consider how they will work together not just in the initial phases, but also in potential resale situations.

Knowing who you will be in business with—both the good and the bad—is essential to identify early on. Here’s why:

• Alignment of Goals and Values: Ensuring that the franchisee’s goals and values align with those of the franchisor is fundamental for a successful partnership. This alignment helps maintain the integrity of the brand and ensures that all parties are working towards common objectives.
• Operational Cohesion: Franchisors need to ensure that potential franchisees have the right skills, mindset, and attitude to operate the business effectively. This includes assessing their ability to follow established systems and procedures, which is critical for maintaining consistency across the franchise network.
• Long-term Success: The mutual assessment helps both parties understand each other’s expectations and capabilities. By identifying any potential misalignments early on, they can address concerns before entering into a formal agreement, reducing the risk of future conflicts.
• Support and Growth: Franchisors are looking for franchisees who are not only capable of running the business but are also willing to grow and improve. This means being open to feedback, participating in training programs, and actively engaging with the franchisor’s support systems.

When considering how a franchise system and a potential franchisee will interact in a resale situation, it’s important to evaluate the long-term relationship. The franchisor needs to trust that the franchisee will maintain the brand’s standards and values, which will, in turn, make the business more appealing to future buyers. This forward-thinking approach ensures that the franchise system remains strong and cohesive, even as individual ownership changes.

For potential franchisees, understanding this process is beneficial. It allows them to see that the franchisor is committed to their success and is invested in building a strong, supportive relationship. This mutual vetting process ensures that both the franchisee and the franchisor are entering into a partnership that has the best chance of long-term success.

By being thorough in this assessment, both parties can move forward with confidence, knowing that they have found a good fit. This mutual understanding and commitment set the stage for a successful and productive franchise relationship, ultimately supporting the long-term goals and exit strategies of both parties.

Good Rule of Thumb for Evaluating Franchise Fit

As a potential franchise buyer, it’s important to understand the criteria that many franchisors use to evaluate their franchisees and the standards they uphold to ensure the success of the entire franchise system. Here are some key points that franchisors typically consider and why they matter:

• Debt Management: A good rule of thumb is that franchisees should not have debt exceeding 3.5 times their EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). This helps ensure that the business remains financially stable and can manage its obligations without undue stress.
• Performance Review: Franchisors often have finance, development, and operations teams review franchisee performance. Franchisees making 5% or below in EBITDA may be placed on a closure mitigation list and receive targeted support to improve their profitability. This proactive approach helps struggling franchisees get back on track.
• Succession Planning: It’s crucial to include succession planning in your business strategy, ideally even in your will. This ensures that there is a clear plan for the future of the business, whether you decide to sell, retire, or pass the business on to a family member.
• Brand Engagement: Franchisors measure brand engagement by monitoring participation in webinars, attendance at conferences, and involvement in field visits. If a franchisee stops engaging, it’s a signal for the franchisor to re-engage and offer support. This helps maintain a strong, cohesive franchise network.
• Pruning for Success: Sometimes, it’s necessary for franchisors to recognize when a franchisee is no longer a good fit for the system. This could be due to cultural misalignment or failure to meet performance standards. In such cases, offering an exit option is a compassionate approach that protects the investment of other franchisees and maintains the integrity of the brand.

Understanding these evaluation criteria is crucial for potential franchisees because it highlights the franchisor’s commitment to supporting and improving their network. It also underscores the importance of maintaining high standards and being prepared to meet them.

Why It’s Important to Know Your Options

Knowing what franchisors look for and the support they offer can help you make informed decisions when selecting a franchise. This knowledge is essential because it allows you to make well-informed decisions about whether you are prepared to meet the franchisor’s standards. Being aware of the financial and operational expectations helps you assess your readiness, preventing future conflicts and ensuring a smoother franchise experience. Additionally, understanding the differences between franchise systems enables you to choose one that aligns with your goals, values, and business style. This alignment is crucial for both personal satisfaction and business success.

Furthermore, being informed about the support available from franchisors allows you to leverage these resources effectively, thereby enhancing your chances of success. This includes financial guidance, performance improvement programs, and engagement initiatives. A franchise broker can be an invaluable resource in this process, helping you navigate the complexities of selecting a franchise and ensuring that you find a system that meets your needs and aligns with your long-term goals.

Brokers have the expertise and connections to guide you towards franchises with strong support structures and clear performance expectations. By partnering with an FBA franchise broker and doing thorough research, you can enter the franchise world with confidence, knowing that you have the tools and knowledge to succeed and make informed decisions about your future in franchising.