Selling Your Franchise or Business: Valuation, Preparation and Process

Selling a business is one of the biggest financial decisions an owner makes, and selling a franchise adds a second party to the deal: the franchisor. A well-prepared sale starts long before a buyer appears, with clean records, a realistic view of value and an understanding of what the franchise agreement requires.

This guide explains when owners sell, how businesses are valued, what a valuation involves, how to prepare, how franchisor approval works, where buyers come from, what the timeline looks like, and whether to use a broker. It does not predict what any particular business will sell for; that depends on the business, the market and the buyer.

Buying? Read Buying an Existing Franchise or Business.   Selling? Read Selling Your Franchise or Business.

When owners decide to sell

• Retirement or a planned exit at the end of a business plan.
• A life change: relocation, health, family or a new opportunity.
• Burnout, or a desire to move from operating to investing.
• Timing around the franchise term: an upcoming renewal, remodel or lease decision.
• Partnership changes, where one owner wants to buy out another or both want to exit.

The best time to prepare is before you need to sell. Buyers pay closer attention to businesses with steady results, organized records and a team that does not depend entirely on the owner.

How businesses are valued

Most small and mid-size businesses are valued on the cash they produce for an owner. Two common measures are:

• Seller’s discretionary earnings (SDE): pre-tax profit with the owner’s salary and benefits, interest, depreciation and one-time or discretionary expenses added back. SDE is typical for owner-operated businesses.
• EBITDA: earnings before interest, taxes, depreciation and amortization, more common for larger businesses with management in place.

A multiple is then applied to that figure. What moves the multiple up or down includes the stability and trend of earnings, how much the business depends on the owner, customer concentration, the strength of the brand, the remaining term of the franchise agreement and lease, the condition of equipment, the industry and local market, and how easy the business is to finance. Valuers may also consider the value of the business’s assets and recent sales of comparable businesses.

Asset sale or stock sale?

Most small business sales are structured as asset sales, in which the buyer purchases the business’s assets rather than the owner’s company itself. Some are stock or membership-interest sales. The structure affects taxes, liabilities and how contracts transfer, so buyers and sellers often prefer different structures. Talk with your accountant and attorney before you agree to one.

What a valuation involves

A valuation professional, broker or accountant will usually ask for:

• Three to five years of tax returns and financial statements, plus the current year to date.
• Sales reports and royalty statements from the franchisor’s systems.
• A list of owner add-backs, with documentation.
• The franchise agreement, the lease and any amendments.
• An equipment list with age and condition.
• Staff roster, wages and roles.
• Key customer or contract information, where relevant.

The result is usually a range, not a single number, along with an explanation of what drives value up or down. A valuation is an estimate; the final price is set by what a qualified buyer agrees to pay and a lender agrees to finance.

Preparing the business for sale

• Clean up the books: separate personal expenses and make financial statements easy to follow.
• Reduce owner dependence: document processes and develop a manager who can run day to day.
• Review the lease: check remaining term, renewal options and assignment terms; talk with the landlord early.
• Address deferred maintenance and any remodel the franchisor is likely to require.
• Keep performance steady: buyers look closely at recent months.
• Gather your documents so you can respond quickly once a buyer is serious.

Franchisor approval, transfer fees and right of first refusal

If you own a franchise, your franchise agreement controls how you can sell. Item 17 of the franchisor’s Franchise Disclosure Document (FDD) summarizes the transfer conditions. Common conditions include the franchisor’s approval of the buyer, a transfer fee, the buyer completing training, the buyer signing the franchisor’s current agreement, upgrades to current standards, and a general release from the seller. Many agreements also give the franchisor a right of first refusal: the right to buy the business on the same terms as an offer you accept. Read your agreement, ask the franchisor about its transfer process early, and build its approval into your timeline.

Finding buyers

• The franchisor, which may know of approved candidates or existing owners looking to grow.
• Other franchisees in the system who want additional units.
• Business brokers and online marketplaces.
• Employees or managers who know the business.
• SBA-financed buyers: many individual buyers use SBA-backed loans, so a business with clean records and a brand that is eligible for SBA financing can be easier to sell. Learn about SBA Express loans.

Use a confidentiality agreement before sharing details, and screen buyers for financing and franchisor qualifications before you spend time with them.

Timeline

Every sale is different, but most move through the same stages: preparation and valuation; marketing the business and screening buyers; negotiating a letter of intent; due diligence and buyer financing; franchisor approval and the landlord’s consent; and closing and transition training. Preparation alone can take months, and financing and approvals add more. Plan for the process to take longer than you expect.

Working with a broker vs. selling yourself

A business broker typically helps value and package the business, market it confidentially, screen buyers and manage the process, in exchange for a commission set out in a listing agreement. Selling on your own avoids the commission but puts the marketing, screening and negotiation on you. Some franchisors have resale programs or preferred brokers. Whichever route you choose, use an attorney experienced in business sales and an accountant who can advise on taxes.

See if you qualify for financing from the SBA for approved franchises.*

*No impact to your credit score. For informational purposes only.

Thinking about buying instead?

Our companion guide covers resale vs. new, due diligence and financing from the buyer’s side. Read Buying an Existing Franchise or Business.

Frequently asked questions

How much is my business worth?

It depends on its earnings, risks, brand, lease, equipment and market. A professional valuation gives you a range and explains what drives it. This guide does not estimate values for any particular business.

Do I need my franchisor’s permission to sell?

Almost always. Your franchise agreement and Item 17 of the FDD set out the transfer conditions, which often include approval of the buyer and a transfer fee.

What is a right of first refusal?

A provision in many franchise agreements that lets the franchisor buy your business on the same terms as an offer you have accepted. Check your agreement and plan for it in your timeline.

How long does it take to sell a business?

It varies widely. Preparation, marketing, buyer financing and franchisor and landlord approvals each take time. Starting preparation early is the most reliable way to shorten the process.

Should I tell my employees I am selling?

Most owners keep a sale confidential until it is close to final, to avoid unsettling staff and customers. Plan when and how to tell key employees with your adviser.

This guide is general education, not legal, tax or financial advice. Work with an attorney, an accountant and, if you use one, a business broker on any purchase or sale.