I have done a short search but not found what I’m looking for so I’ll start a new thread.
I am ready to list my 2nd location for sale as a franchise and one of the details to include is whether or not to offer financing. (Obviously, this can be a selling point.)
I have always thought this was a bad idea (I purchased my first set of equipment from the original owners in an “owner financing” deal) but realize that it is quite typical in the restaurant business.
It is conservatively (but realistically) valued in the five figure range (includes franchise fee, training, and support), and given such, I hope to avoid the whole scenario of owner franchising. (They could not build it out for what I will sell it for, unless they did nearly everything themselves, and it would be close at that.)
My gut says to not offer financing and wait for responses first, to determine whether it is truly necessary.
If I should end up having to provide it, is there any advice out there as to how I should handle it (obviously with a lawyer) with terms and what not? Any related experiences would be great.
I would not offer the financing in your listing but hold the issue aside. On the other hand, don’t let reluctance to offer it stop you from doing a fair deal with a good buyer. Everyone has a different set of circumstances; only you can determine your own comfort level… For my own part, I would be willing to carry up to 20% of a deal to make it work. In a tough selling market, carrying 50% might make good sense. If there are no buyers in sight and you just want out, a seller might carry more than that.
Based on the business sales data bases I work with as a business broker, about 40-50% of small business sales involve some seller financing and the average interest rate is 9%.
If there is a buyer with the experience to help them succeed and enough cash to be commited to the deal and it takes carrying a piece of the deal over 5 years at 9% I would have to believe there was an all cash buyer around the corner to pass it up.
To sum up:
Don’t offer it in the listing.
Be prepared to answer the questions of how much you would carry, for what kind of a buyer at what rate and for how long.
You have the right to ask a buyer for financials and credit references. If you are considering offering credit, be sure you do it.
At the point in the listing agreement where you indicate the terms of the sale I suggest to people that they select “cash” and add “or other terms acceptable to the seller” to leave the door open.
What is worst case and best case scenario and the range of possible outcomes? Let’s say you sell your business for 100K and carry 25K for five years. The buyer comes up with 75K at closing. If they fail and never make a payment you sold the place for 75K, if they make it five years and pay you off you get a 9% return (or whatever rate you agreed to) on 25K which makes your total return better than the 100K selling price.
Only you can determine if this works for you, but it should not be something you dismiss out of hand.
Thanks much for your quick and detailed response (to an '87 WSC grad and former Colorado native before the US Navy took me far away).
These have pretty much been my thoughts, though I wouldn’t have thought of the “terms acceptable to the seller”.
From a franchsing perspective, I am more concerned with selling to the right person than squeezing out a few additional $$Ks. (For this reason, the background/credit check is a foregone conclusion.)
I would echo bodegahwy’s thoughts. It seems a lot of people looking to buy an existing business are short on cash. Plus, if you do not include “seller financing” in the listing, but offer it later, you can count that as one concession you have already made in the negotiations without having lowered the price.
Pizza Chop, I was in Gunny earlier this week during my vacation. You would not believe how much water is in the river this year. The black canyon dam flowed over the top for the first time in a few years and the river still unwadable all the way to the Taylor reservoir.
Now you are making me home sick. I haven’t seen the black canyon for almost 30 years. I spent my youth in Delta on Hiway 50 between Grand Junction and Montrose.
Stay away from the franchise idea. If you are selling it because it isn’t profitable (and why else would you be selling), the franchisee is going to be less of YOU than you are, and will probably make less. Franchising your concept is also a huge PITA. If you really are interested in opening that can of worms, hire a lawyer to do the paperwork today. The 5 figure selling price is peanuts compared to a liability law suit (not to mention the mental drain of a court case).
I would stay away from owner financing. The economy stinks, people don’t have money. Take what you can and concentrate on building business at shop 1 is the best advice I can give. Going after pennies at shop 2 and letting the dollars slip away from store 1 is something I have seen many people do.
You are on the right track with wanting to sell, don’t get derailed by bad advice and poor judgment. People don’t like to change course mid stream, and will stick to a failing plan far too long, paying dearly for it later.
bodegahwy wrote:
Pizza Chop, I was in Gunny earlier this week during my vacation. You would not believe how much water is in the river this year. The black canyon dam flowed over the top for the first time in a few years and the river still unwadable all the way to the Taylor reservoir.
Now you are making me home sick. I haven’t seen the black canyon for almost 30 years. I spent my youth in Delta on Hiway 50 between Grand Junction and Montrose.
bodegahwy & Daddio,
Wow, can’t believe I stumbled onto a couple of guys who know the Western slope. Spent 3.5 years around the area, with fond memories of ice fishing on Blue Mesa, skiing at CB, and just enjoying place in general. Brought my wife through in '91 and we stopped in Ouray and Gunnison on our way to Denver.
Pizzamancer,
It’s too late, I’ve bought the farm (or mortgaged it). The FDD (new name for the UFOC) is finished, the name and logo is a registered trademark, and there’s no turning back. The 2nd location is profitable and probably has more longterm potential than my 1st location, but with two stores and 8 kids, something’s gotta give. I understand and appreciate your point of view, and I’m in complete agreement regarding the need to focus on the main store. (There’s a long story there, which I’ve shared on another thread regarding 2nd locations which I believe you’ve contributed to as well.)
I am curious regarding your franchising experience and covet any lessons learned I could glean from it (since it’s too late to go back). Please PM me at your convenience if you feel like it.
You know it. The corn they try and sell here is what they use for cattle feed there. I haven’t had a good corn feast since 1978. I also miss the Paonia cherries. I remembers some good times at the Chery Festival there.
All the above advise is on the mark but I would add one little tweak to the seller financing situation. Using the above figures arbitrarily, 100k sale, you financing 25K, I would want to make sure the 75K portion is cash and not also a loan from some other source to the buyer. You want the buyer to be as heavily invested as possible for obvious reasons. And a 5 year term should be the absolute longest I would take.
Good luck.
pizzachop…
How did you handle the paperwork for the franchise agreement? Did you get a franchise lawyer? Are you now under the SEC jurisdiction? I heard a good franchise lawyer way like $200,000. Is that possible?
I used a local, reputable franchise attorney. (He has worked with a lot of regional restaurants, including Zaxbys.) I have spent less than $40K though anywhere from $35K-$75K is typical, from my investigation.) The deal includes the FDD (Franchise Disclosure Document, formerly known as the UFOC, which is the heart and soul of the franchise), a Daily Operations Manual, and a Pre-Opening Manual.
Franchise law is governed by the Federal Trade Commission (FTC), and the FDD must be developed/written according to their criteria (essentially covering 23 points).
It’s a long, detailed process and I hope it pays out. As others on this forum have indicated, there are pitfalls to this process, and potential for financial ruin through lawsuit, but I think that’s where a good attorney (who adamantly gives advice to the new franchisor) comes in.
There are do-it- yourself kits out there, but I didn’t think I was up to this one.