Franchise Resale Guide 5 29 19 : simplebooklet.com

©2019 Franchise Services, Inc. All rights reserved. Version 1—May 2019IntroductionSelling your business is typically a once-in-a-lifetime event. It requires a focused effort on your behalf to ensure the business builds and maintains value, while continuing to operate at a proﬁtable level during the resale process—a process that could take more than a year. Additionally, there are numerous legal, ﬁnancial, and franchise contract related activities that must be completed to successfully complete a sale. The purpose of this manual is to provide you with insight into the process of selling your franchised business.This manual provides you with a general process for selling your business. We also recommend you seek additional guidance from experts and trusted advisors, such as:• A qualiﬁed business broker, to conﬁdentially expose and present your business to a pool of qualiﬁed buyersand guide you through the entire sales process.• An accountant, to advise you on ﬁnancial and tax questions regarding the transaction.• An attorney, familiar with mergers and acquisitions to represent you during the process.• A ﬁnancial planner, to assist you with decisions that affect your personal ﬁnancial future.Understanding the Resale Transfer ProcessThe sale of your franchise business can be complex, and we want to work with you to make the process as easy as possible. Once you’ve made the decision to sell, it’s important that you ﬁrst inform Franchise Services, Inc. Once notiﬁed, we will send you a resale package that outlines the actions required from you and the buyer.A franchise is almost always worth more than an independent business. An average prospect for our business has no printing background and wants to be in business for themselves but not by themselves. They see a signiﬁcant advantage in the support available from a franchisor. Most have a sales, marketing or ﬁnance background. We have many resources that you or your broker can share with a qualiﬁed buyer to demonstrate the additional value of being in a franchise.As we have over 50 years in business, contractual obligations change over time, so the speciﬁc requirements of your franchise agreement can vary. Each resale must be approved in advance by Franchise Services, Inc. through a process known as Franchise Review Committee (FRC).Conﬁdentiality is critical once the business is listed. Business operations can be adversely affected by the uncertainty of a potential change of ownership when employees, customers, and vendors ﬁnd out the business is for sale. You will also typically not share speciﬁc customer information until the sale has completed.We recommend you work with an experienced business broker, and we suggest that you consider Sunbelt Business Brokers. We have a national account agreement with them, and as a franchise business themselves, they have a better understanding of the value of a franchise system, as well as the franchise sales process.A business broker will help you in the following ways:• Understand what’s important to you and deﬁne the sales process• Assist you in setting a price on your business• List your business online on various sites (currently, Bizbuysell.com is the main one we recommend)• Collect leads and get them “prequaliﬁed”• Set up site visits and meetings1

Page 4

©2019 Franchise Services, Inc. All rights reserved. Version 1—May 2019• Prepare all associated paperwork• Support you through the closing processOnce a prospective buyer is interested in learning more about your franchise business sale, they will sign a non-disclosure agreement (NDA) to receive additional information, typically a business proﬁle that discloses your business’s history and ﬁnancial performance. The prospective buyer will make a contingent offer to purchase the business if interested in moving forward. The contingent offer is negotiated and signed by the buyer and seller and earnest money is used to secure the offer. The due diligence period begins, which includes review of the business ﬁnancials such as tax returns, proﬁt and loss (P&L) statements, balance sheets, and other pertinent information. Each prospective buyer will need to submit a Request for Consideration (RFC) with supporting documents to Franchise Services, Inc. It will be your responsibility to alert Franchise Services, Inc. you have found someone interested in purchasing your business in addition to providing us with a copy of the buy/sell or purchase agreement. Once received, Franchise Services, Inc. can begin to discuss support and strategy with the prospective buyer to promote the value of the franchise. The due diligence period typically takes 30–90 days. Once we have approved your franchise resale, you can move forward with scheduling a closing date, assuming both parties are ready to move forward. An independent closing attorney will prepare documents, and you, your broker/advisors, and the buyer will review and ﬁnalize the documents. At closing, you will meet to sign the documents and funds will be transferred. Included in those documents will be a Consent to Transfer agreement and a new franchise agreement your buyer must sign and return to Franchise Services, Inc. The “closing” is the ﬁnal step for you, the franchisee. Here is where you will “turn over the keys” to the buyer and the sale becomes ofﬁcial. This is when the funding will take place and you get paid. In most cases, the seller will have a few more responsibilities following the close of the business. Typically, the seller will provide a few weeks or even months of additional support and training to the incoming buyer. And, as each new owner will need to attend University in Mission Viejo, California, the seller will often provide support, as agreed, to cover that time frame as well.Identifying When to SellThe process to exit (sell) the business successfully starts years in advance. Selling your franchise business at the right time is critical to maximize your return. Going to market because you “have to” tends to not only push down value, but also pushes down the likelihood a deal gets done at all. You should avoid selling due to life circumstances such as divorce, declining sales, declining health, and dissolution; planning ahead is the best way to accomplish that. Remember, a focused effort to prepare the business for sale ideally starts at least two (2) to three (3) years before the business is presented to the market. We suggest, you write down your goals, when you want to exit the business and how much money you would like to sell it for. Doing so will help with long-term planning and in maximizing the value of your business before you place it for sale. Update your exit strategy on a regular basis. Consider assembling and maintaining an exit plan as part of your annual business planning. 2

Page 5

©2019 Franchise Services, Inc. All rights reserved. Version 1—May 2019The very best time to sell your business is when three variables—personal, business, and marketplace timing—are at their peaks. Your goal is to determine when each of the three variables will combine to maximize the value of your business. Personal Readiness: Can you picture your life without your business? Are you ready to retire? The reality of business valuation is that if you continue to run your company for approximately three more years, you will earn close to the full sale price that anyone would pay today. If your response to that is, “That’s crazy, why wouldn’t I just work for three more years?” then that’s a pretty good indicator that you aren’t quite ready to move on. Business Readiness: Selling your business when it’s at a ﬁnancial and operational high is often when it will bring the greatest purchase price. Measuring and maximizing the market value of your business involves many factors: current and projected ﬁnancial performance, cash ﬂow, margins, customer mix, status/existence of renewable contracts, equipment condition, strength of management staff, and the perception of your business in the marketplace. Marketplace Readiness: The two greatest factors with marketplace readiness are the condition of the economy and “supply and demand.” Buyers are typically scared to purchase a business during a downturn in the economy, which diminishes the chances of you maximizing the value of your sale. Conversely, buyers are typically more inclined to purchase and pay a higher value during an economic boom. Pay attention to supply and demand. Timing to sell in a seller’s market, vs selling in a buyers market, leads to high prices and better results.3

Page 6

©2019 Franchise Services, Inc. All rights reserved. Version 1—May 20194Preparing for a SalePrepare Yourself FirstBefore you begin the process of selling your business, it is important that you go into the process with the correct mindset. Be sure that you are mentally and emotionally ready. Franchisees who have a very clear understanding of why they want to sell and what they plan to do after the sale are more prepared to handle the challenges that can come along with the sales process. Patience and ﬂexibility are required. Preparing your business for sale can take several years. Understand that the process is a marathon, not a sprint. Pace yourself and stay focused on the end goal. It’s very easy to get “emotionally attached” to your business and you will need to respond logically to the upcoming transaction—less like selling your “baby” and more like selling your stock in an investment. Begin looking at your business critically, as if you were a buyer. This can be a difﬁcult mindset to maintain. It is absolutely critical that you keep the business running at peak level throughout the sales process. If employees become disgruntled, revenue declines, and proﬁt drops, it could reduce the value of the business. This is one advantage of working with a business broker. They can focus on running the sales process while you stay focused on running your business. From the date your business is placed on the market to the date it is sold, you should continue to closely manage the business, monitor the numbers, and take action as needed to ensure positive performance. Little things matter: keep your customers satisﬁed, keep your equipment well maintained, and ensure your facility is attractive and presentable. It’s crucial you stay fully engaged in your business until the very last day! There are a few additional factors you should consider:• Be sure you are motivated and truly ready to sell. Nothing hinders the sale of a business more than an unmotivated seller.• Be sure you have realistic expectations of what your business is worth. Get a formal valuation from a professional in your area.• Be prepared to be ﬂexible. Deal negotiations can become intense as your emotions and the buyer’s ambitions may easily collide. Know how much you are willing to give up in negotiations before you even start. • Often a buyer will say things that can be taken personally. Don’t be offended. This can be VERY difﬁcult. Keep the end-game in mind. Preparing FinanciallyTo get started in making an accurate assessment of your business, you’ll need to prepare your ﬁnancial statements for the previous three years. You will need to prepare the following:• Proﬁt and Loss statement (P&L) for the current and past two to three years.• Current balance sheet.• Business tax returns should be prepared to show a minimum of the last three years tax returns. These should tie in with your personal tax returns and your business’s ﬁnancial statements. If you have any ﬁling extensions in place, you will need to clear them up. • Personal tax returns should be prepared to show a minimum of three years’ worth of tax returns. If you have any ﬁling extensions in place you will need to clear them up. • Get current on all taxes. These include, but should not be limited to, federal, state, and payroll taxes.

Page 7

©2019 Franchise Services, Inc. All rights reserved. Version 1—May 20195• Taxes should tie in to ﬁnancial statements. • P&L should tie in to owner beneﬁts. • List of all leases on equipment.Legal and Licensing PreparationIn addition to your ﬁnancial records, it’s important that you have all your legal, business, and licensing documentation in place, including:• Ownership documents are up to date.• Legal structure best suited for sale—review with your legal counsel.• Make sure you have clear title to any major assets you intend to sell.• Licenses and permits are up to date.• Building lease is current and assignable.• Collect outstanding debts.• Resolve any outstanding lawsuits or disputes to the best extent possible.Franchise-Related PreparationThere are several franchise-related items to take into consideration as you prepare your business for sale:• Make sure your monthly reporting is up to date and ties in with your ﬁnancial statements and tax returns. The reports due up to the day of closing will be required at the time of closing.• Remain current with all ﬁnancial obligations to Franchise Services, Inc.• You are required to pay a Transfer Fee. That fee is outlined in your franchise agreement and pays for administrative costs and the new owners’ training. Some transfer fees also cover additional expenses. See your franchise agreement for speciﬁc details.• As part of the closing process, you will be executing a “Transfer Approval Request.” Upon FRC approval, it acts as your permission to sell your franchise to this buyer.Your business must be sold to a buyer willing to sign a franchise agreement with us and work under the terms of that agreement. There may be different terms and conditions in the new agreement than in the agreement you are currently working under, including different franchise fees and a different royalty structure. Please consider this when you are communicating with your business broker, attorney, and accountant as well as the buyer, and address appropriately. If required, the new franchise agreement is contained in the Franchise Disclosure Document (FDD) and is available upon request from Franchise Services, Inc.Getting Your Center in OrderMake sure your business is ready for a prospective buyer. The quicker buyers can understand your operation and picture themselves running it, the more conﬁdent they will be in buying the company and paying top dollar. Is your business plan current and easy to understand? Interior and exterior portions of the business should be clean and polished, and anything with your logo on it should be current and sharp. Do you have your processes well documented? Is your facility fresh, clean and safe? Is your operation well organized? Work on the following:Business Location• Clean, organized and efﬁcient (windows, walls, paint, carpet)• Updated current look and feel• Updated outside signage• Updated interior graphics and colors

Page 8

©2019 Franchise Services, Inc. All rights reserved. Version 1—May 2019• Compliant with local building codes and proper licenses in place• Lease agreement in place, assignability veriﬁedEmployees• Employee ﬁles up to date• Employee handbook in place• Training up to date and documented• Succession plan in place for management• Employees in branded apparel and compliant with current brand standardsEquipment• Clean, operational and safety mechanisms operational and in place• Right equipment for the jobs you service• Maintenance records up to date• Assignability of leases (if applicable)• Vehicle(s) up to date and maintainedWorkﬂow• Up-to-date management information system (MIS) (PrintSmith / Printer’s Plan)• Clear workﬂow process in place• Online storefronts up to date and catalogued• Inventory taken and stored in an organized fashion• Organized record-keeping6

Page 9

©2019 Franchise Services, Inc. All rights reserved. Version 1—May 2019ITEM DESCRIPTIONUp-to-date ﬁnancial statements Prior 3 years and YTD (P&L, Balance sheet, etc.)Business tax returns Prior 3 yearsOwnership documents up to date Current ownershipLegal structure ideal for sale Review with legal counselLicenses and permits up to date Verify license, permits and certiﬁcatesBuilding lease current and assignable Current term and assignable to new tenantAttorney review/guidance Engage with legal counsel to reviewAccounting and tax review/guidance Engage with a tax professional to reviewFranchise agreement review Review and understand Franchise Agreement obligationsTerritory review Review and understand current territoryBusiness broker Interview and select a business brokerBusiness plan Update your business planRoyalties and advertising current Up-to-date payment of royalties and advertisingFacility clean and organized Ofﬁce, shop, yard, parkingCurrent year budget in place For current year and next year if within Q4Employee handbooks Up-to-date and signed copies in employee ﬁlesEmployee ﬁles up to date Up to date and secureEmployee training up to date All staffMIS system Verify and conﬁrm latest versionEquipment inventory A full inventory of ALL equipment and conditionEquipment clean, safe and in good repair Inspect and conﬁrmMaintenance records up to date Up to date and in writingPreventive maintenance schedule Up to date and in writingAssignability of equipment leases VerifyEquipment maintenance agreements Verify and make copies for buyerPre-Sale Checklist7

Page 10

©2019 Franchise Services, Inc. All rights reserved. Version 1—May 2019ValuationGeneral Valuation InformationIt is important you have a clear and realistic valuation of your business before starting any resale activity. Business valuation is a process and requires a set of procedures used to determine what a business is actually worth. The valuation should be based on solid data from historic performance and marketplace realities. You should not do your own business evaluation. Get your evaluation done by a professional, such as an experienced business broker or business appraiser. The majority of our resales are asset sales (selling the assets of the business that include the “goodwill” of the customer list). Occasionally, there is a “stock sale,” however, in almost all cases, these involve some sort of signiﬁcant owner ﬁnancing. It should also be noted that it is very rare that a sale includes any real estate. If you own the building you’re in and want to sell it, consider making it available but not a requirement of buying the business. Determining how much your business is worth depends on many factors, from the current state of the economy through your business’s balance sheet. There are several methods that can be used to value a business. The following provides information on the primary method that historically has been used most often in selling our franchised businesses.Seller’s Discretionary Earnings (SDE)Most experts agree that the best starting point for valuing a small business is to normalize or recast the business’s earnings to get a number called the “Seller’s Discretionary Earnings (SDE).” SDE is also known as owner beneﬁt or owner cash ﬂow. This methodology is preferred by business brokers when a seller has a proﬁtable business, because this valuation methodology tends to maximize price, which both broker and seller like. SDE takes into consideration a buyer’s single biggest concern: “How much money can I make?” To calculate SDE, take your EBITDA—earnings before interest, taxes, depreciation, and amortization—and add back in your owner compensation and any one-time expenses that aren’t expected to continue in the future. SDE shows everything you as an owner take out of the business. SDE = EBITDA + owner’s compensation + one-time expenses. Here are some examples of things that would be added back into the net income reported on your business’s tax return to calculate SDE:• Your salary, or total salary of all owners• Any perks you or other owners receive (like personal travel or personal vehicle payments)• Family members on payroll holding non-essential positions• Leisure activities, such as business golf outings• Charitable donations• Any personal expenses, like the purchase of a personal vehicle• Business travel that’s not essential to running the business• One-time expenses that are unlikely to recur after the sale of the business, such as the settlement of a lawsuit8

Page 11

©2019 Franchise Services, Inc. All rights reserved. Version 1—May 2019Once the SDE is determined, a multiplier is applied to establish the value of the business. The multiplier used varies on several factors, including industry, customer diversity, company size and owner risk. If the business is highly dependent on you or another owner, it cannot be easily transferred to new ownership and the business’ valuation will suffer. If you’re selling a business in an industry and/or area that is expected to grow in the near future, the SDE multiple could be higher. Most Main-Street, non-franchised small businesses in our industry are selling for a multiple of 1.0x–2.0x SDE. Being part of a strong franchise brand like one of the Franchise Services, Inc., brands adds to the marketability of your business. For that reason, our franchise businesses typically sell for a multiple of 2.25x to 3.25x. (See example below.)Annual Revenue $1,150,000Net Income (14%) $ 161,000Int, Tax, Dep & Amort Add Back $ 35,600EBITDA $ 196,600Second Owners Salary $ 34,000Charitbale Donations $ 2,400Any Personal Expenses / Perks paid by business $ 22,400Business Travel not essential in running business $ 1,800One Time Charges Add Back $ 8,000Total Owner Beneﬁt & One Time Charges $ 68,600Total Sellers Discretionary Earnings $ 265,200Independent Business Value Range SampleApply SDE multiple of 1.6x – 2.5x for approx. value $424,320 – $663,000Franchise Business Value Range SampleApply SDE multiple of 2.5x – 3.5x for approx. value $663,000 – $928,200 *Add back Interest, Taxes, Depreciation & Amortization Expense** *Owner/family vehicles, gas, insurance, phones, etc.* *Add back any large one time charges*All of the numbers used in this example are for illustrative purposes only and should not be considered anything other than sample data. Franchise Services, Inc. cannot and will not guarantee that your business will sell or that it will sell according to these noted ranges.9

Page 12

©2019 Franchise Services, Inc. All rights reserved. Version 1—May 2019How to Improve Business ValueFrom a buyer’s perspective, proven proﬁtability and future earnings potential are the most attractive qualities in a potential business acquisition. By documenting a multi-year track record of proﬁts and positive cash ﬂow, you can drive up the value of your company substantially – should you choose to use the SDE valuation method.Another strategy for improving business value is basic organization. As outlined in Section Two of this manual, accurately maintained ﬁnancial records, documented employee policies and training, and a clean and organized facility, all count when it comes to the amount buyers are willing to pay for your business. Simplicity has value, and the easier it is for buyers to understand your business and envision themselves at the helm, the more likely it is your business will sell for its full value.Finally, most sellers ultimately realize that they need to enlist the assistance of a qualiﬁed business appraiser or broker to accurately value their businesses. A good appraiser or broker, with a proven track record in our industry, can signiﬁcantly shorten the sale process by ensuring that your business is priced to move in the current market.10

Page 13

©2019 Franchise Services, Inc. All rights reserved. Version 1—May 201911Marketing Your Franchise BusinessDeveloping an Executive OverviewSimilar to a résumé, the Executive Overview provides the highlights or main selling points of your business. The main objective of an Executive Overview is to build the interest of potential buyers. The overview will provide enough information to answer a majority of the initial questions prospective buyers will have and consequently save you time. If you choose to use a business broker like Sunbelt Business Brokers, your broker will help you build your business proﬁle.Whatever your reason for selling your business, prospective buyers will ask why you are selling. The answer you provide can have an impact, positive or negative, on the sales process and outcome. We encourage you to think about this question and prepare an appropriate response. You will most likely need to address a reason for selling the business in the Executive Overview (e.g., “I’m ready to retire”).There is no standard way to write an Executive Overview, but keep in mind the overview is essentially a sales document and needs to be written for the person reading it, the potential buyer. Remember the audience. It should paint a picture of a business that the buyer should want to buy. The following is a brief guide to creating a typical Executive Overview:Executive Overview• Summary: Start with a few paragraphs that emphasize the key strengths of the business and a brief overview of the content within the proﬁle.• Business Attributes: Key selling points of the business, such as recent growth, high level of customer retention, contracts that generate recurring revenue, etc., in addition to including beneﬁts of being part of a franchise network.• Business History: Brief overview and your speciﬁc start date and accomplishments over the years.• Reason for Selling: Provide the reason for selling the business. Be honest, but take care with your phrasing, as it could cause potential buyers to lose interest.Operations• Services: Overview of the services you offer. Be sure to list all core and select services with brief descriptions.• Industry: Give a brief overview of the industry including the history and what can be expected in the future. Does your business have signiﬁcant market share that is worth highlighting? How much direct competition is there in the local area?• Licensing/Certiﬁcations: Disclose any speciﬁc licensing or certiﬁcations that will be needed to continue running your business.• Customers: Provide an overview of the customer base for the business. Discuss the mix of business, markets you service, average job size, and other relevant information. Individual customer information should not be disclosed at this time.• Personnel: Create an organizational chart that indicates management staff and other key positions in the business. Provide general information on responsibilities of key team members.• Seller’s Role: Paint a picture of the day in the life of an owner. Buyers want to understand what’s to be expected on a day-to-day basis.• Improvement and Expansion Potential: Cover the future opportunities that can play an instrumental role in increasing revenue and proﬁts.

Page 14

©2019 Franchise Services, Inc. All rights reserved. Version 1—May 201912Asking Price, Terms, and Other Details• Asking Price and Terms: State the asking price and document how this valuation was determined.• Equipment: Provide a short overview of the equipment that is included in the sale.• Buyer Qualiﬁcation: Give a short description of the qualities and traits required to qualify to purchase your business.• Training and Transition Plan: Explain the role of Franchise Services, Inc. in the sales process, franchisee requirements, new franchise training, and any additional support you will provide through the transition.Financial Statements and Adjustments• Financial Statements: Provide a brief summary overview of three years’ worth of ﬁnancial performance and any other information you feel is helpful to present a clear picture of the ﬁnancial position of the business. If your ﬁnancials have been recast, it is important to explain the methodology. Full P&Ls, tax documents, and detailed supporting documentation should be provided after an offer is made and due diligence begins.• Asset List: Provide detailed information on any assets that are considered important to the business, such as inventory, equipment, vehicles and ﬁxtures. Include the age, condition and value of these assets.Marketing ApproachesPreparing your business for sale, getting a formal valuation, and completing an Executive Overview are just the beginning steps to selling your franchise business. Now you need to ﬁnd qualiﬁed buyers.We strongly recommend you work with a qualiﬁed business broker. We have a national relationship with Sunbelt Business Brokers: contact Terry Kelm at Tkelm@Sunbeltnetwork.com or (651) 484-0332.You may also attempt to ﬁnd someone on your own, or reach out to Franchise Services, Inc., to discuss prospective candidates who may have recently inquired as to availability of franchise locations that may be available in your area.The following is a brief description of each of these methods.Preferred Method: Listing with a Business BrokerThe preferred method of marketing your business resale is to work with a business broker. A business broker acts like an agent and attempts to sell a business using their own contacts and marketing methods. They can conduct your business valuation, build your Executive Overview, market the business, handle the negotiations and ultimately ﬁnalize the sale of your business.Many business owners believe they are capable of selling their own company. But when it comes to this major ﬁnancial event, owners should consider whether “for sale by owner” is a smart strategy. Consider the following:1) It’s not about negotiating ability. Most people will only sell a business once in their lifetime. Business brokers do it every day. That experience is invaluable for avoiding common mistakes and maximizing net proceeds in a sale.2) Most business owners don’t realize they are leaving money on the table. For example, does the buyer receive the accounts receivable as part of the sale price? If so, how much? What level of equipment is fair to include in the price, if any? How will the purchase price be allocated and what are the tax consequences to each party? These items will have a major impact on a seller’s NET proceeds.

Page 15

©2019 Franchise Services, Inc. All rights reserved. Version 1—May 2019133) Many owners don’t know how to proactively market their business for sale. Understandably so, since this can be a big unknown. In most cases the business owner is limiting their options and ignoring an enormous market of motivated, highly qualiﬁed and well-ﬁnanced buyers if they are not using a broker.4) When selling a business, you want to quietly and conﬁdentially talk to multiple buyers. The typical small business owner has a short list of possible buyers for their business, but business brokers have many buyers in their databases. They can reach many more through conﬁdential marketing. Proactive outreach to strategic buyers will create even more interest.5) Selling a business is time consuming. While your business is for sale, it needs to be running on all cylinders. If your business suffers because you are trying to manage your business and sell your business at the same time, it is sure to cost you time and money.At the end of the day, a broker should add value to the transaction. Sometimes that is getting a higher price. Sometimes, it is the difference between getting a deal done or not.There is a fee associated with using a business broker. Business brokers will charge a commission of approximately 10% of the total sale price, depending on your region of the country and/or the dollar amount of the transaction. Broker fees are most often paid at closing. Business brokers will often require—or strongly request—that you sign an exclusive agreement with them for a cer-tain period of time, with six (6) months as a minimum and twelve (12) months more common. They do this to protect their lead generation efforts and to obtain a return on their time and investment. Be aware that the word “exclusive” in such agreements normally means that regardless of where or how you generate a buyer for your business, you will owe the business broker their standard commission once you close the deal.Market the Business on Your OwnYou may choose to try and ﬁnd a buyer on your own by placing local ads, networking or performing other marketing efforts. When considering this marketing option, please remember that it will take considerable effort and investment to generate, qualify, and educate prospects on your business and then negotiate a deal. Any prospective buyer you ﬁnd must meet our qualiﬁcations and receive our approval from Franchise Services, Inc. before purchasing your business. It’s best to ask your prospective buyer to contact Franchise Services, Inc. immediately, so we can provide them with a Franchise Disclosure Document and help properly qualify and educate them on our franchise system. Non-Disclosure AgreementIt is imperative that you ensure conﬁdentiality before sharing any information about your business. Do not provide your business proﬁle or SDE information to anyone without ﬁrst protecting your interest. Qualiﬁed buyers should sign a Non-Disclosure Agreement (NDA) that states they will not distribute any conﬁdential information they receive or learn about your business.A standard NDA is available on request from Franchise Services, Inc.

Page 16

©2019 Franchise Services, Inc. All rights reserved. Version 1—May 201914Finalizing the SaleInvestigation and Contingent OfferOnce an NDA has been executed, you or your broker will provide your prospective buyer with the conﬁdential Executive Overview document and summary ﬁnancial data. If the prospective buyer remains interested in your business after reviewing this information, a meeting between you and the buyer can be arranged. During this meeting, the buyer will gain a better understanding of the business operation. This is also when the prospective buyer will receive a signed SDE or valuation statement, validating the asking price of the business and stating that all relevant information that has been disclosed at this time is true.If the prospective buyer is serious about getting a deal done, they will make a contingent offer after the meeting. This is typically done with a Letter of lntent or Agreement to Purchase document. All offers are contingent upon buyer’s review and approval of due diligence results at the sole judgment of the buyer.A Buy/Sell or Agreement to Purchase document normally includes, but is not limited to, the following:• The purchase price of the business• The ﬁnance schedule (payments, etc.)• Allocation of assets and liabilities (ARs & AP)• A target closing date• Where the closing will take place• Any formal agreements between the seller and the buyerNegotiating the SaleNegotiating the sale terms can begin during the investigation phase. You also have an opportunity to negotiate once a contingent offer comes in. Typically, you have ﬁve days to respond to the offer. Again, our recommendation is that you use a business broker to handle the negotiations. Assuming full and honest disclosure has been provided in the business proﬁle and information shared during your initial meeting, the negotiation period can be simple and short in duration.Your best tactic when negotiating price is to start with a fair asking price. Be honest during the investigation phase and work with the prospective buyer when it comes time to settle on a selling price that is fair to all sides.You should do your best to stay emotionally disconnected from your perceived value of your business and any funds that have been invested in your business up to that point. Why? Because the buyer is emotionally disconnected from such information. This way you can both meet on common ground established and supported by facts. Likewise, when a gap between list price and offer closes, it may be worth asking yourself how this will impact you long term. Often, agreeing to a small difference in price can mean an easier, faster sale.How a prospective buyer will pay for your business might be discussed and agreed upon early in the process. If you are working with a business broker, they should have already prequaliﬁed the buyer, and preapproved funding may have been secured. However, now is the time to ﬁnalize the terms for payment. While you should prefer to receive payment in full for the business on the day of closing the deal, there are a number of ﬁnancing alternatives to be considered in case it doesn’t turn out to be a cash deal.

Page 17

©2019 Franchise Services, Inc. All rights reserved. Version 1—May 201915For example, you may offer ﬁnancing to the buyer because it gives you a reason to ask for and obtain a slightly higher price for the business and can often speed up the selling process. Note that most prospective buyers interested in this ﬁnancing option will normally only accept a price premium justiﬁed by the attractiveness of your ﬁnancing terms relative to other conventional methods of obtaining funds. Under this scenario, consider collecting a sizeable down payment ﬁrst (20–50%).The primary issue in a sale under terms (usually referred to as a contract sale) is the security of the ﬁnanced portion of the purchase price. This security normally includes the assets being sold; however, you may also require other security (such as a mortgage on other real property) to ensure you receive the payments called for under the sales agreement. Under any such arrangement, you and the buyer will also have to agree on the length of time to pay the ﬁnancing, the payment schedule, and the interest rate. These factors are all subject to negotiation. Your key risk in such an arrangement is the default risk involved; in such a situation it’s possible that the buyer isn’t able to succeed in paying the debt in a timely fashion. This may require you to resume control and operation of the business that has been damaged and is worth less than you sold it for.Once negotiations are complete, you and the buyer will sign the contingent offer, earnest money will be deposited, and the due diligence period will begin.Due Diligence PeriodThe due diligence period typically lasts 30–90 days. During this time, your buyer and his or her trusted advisors will conduct a detailed review of your ﬁnancial statements, including three years of P&Ls, balance sheets and tax returns as well as interim ﬁnancial information. You will want to review the buyer’s detailed personal ﬁnancial information if you are providing any level of owner ﬁnancing. You and the buyer will also review a list of all licenses/permits required to operate the business, and review and approve any equipment included in the sale.Franchise Services, Inc., must approve your resale. During the due diligence period, you and your buyer will be required to submit all associated documentation as needed for approval. Your buyer will also need to be disclosed with the current Franchise Disclosure Document (FDD) 14 days prior to your closing date.If the buyer is satisﬁed and ready to close on the sale, the contingency will be removed and the money in escrow becomes non-refundable. At this point, the buyer will work on several housekeeping duties, including setting up a business entity and business checking account, and securing all of the necessary insurance coverage (general liability, workers’ compensation, vehicle, etc.). You will need to create a list of names and phone numbers for things that must be transferred (e.g., phone, utilities, address, etc.) at the time of the sale.You should ﬁnalize a schedule of accounts receivable that are to be included in the sale and include the complete name, address and phone number of the accounts and the amount owed as well as aging status. Establish the method of collection post-closing. You should also ﬁnalize a schedule of accounts payable if included, detailing who is owed, with address and phone numbers, the amount owed and the due date. Establish the method of payment at or post-closing.The closing attorney will be contacted to schedule the production of closing documents and the date and time of actual closing. The draft of the closing documents should be provided one week prior to close. Both parties should have these documents reviewed by their attorney and accountant right away to avoid last-minute changes. In addition, a settlement statement should be provided by your broker two days prior to closing, and both you and your buyer will need to sign off on it.

Page 18

©2019 Franchise Services, Inc. All rights reserved. Version 1—May 201916ClosingIt’s the big day! You will meet the buyer at the scheduled location and time, usually at the end of a month or the end of payroll period. The closing is typically held at an attorney’s ofﬁce. At closing, you will provide the buyer with customer lists, vendor lists, lease assignments, and present all other documentation required via the agreement to purchase.All legal documents will be signed and funds will be distributed. Included in those documents will be a Consent to Transfer agreement to be signed by you and the buyer, and a new Franchise Agreement to be signed by the buyer. The Consent to Transfer and Franchise Agreement must be returned to Franchise Services, Inc., along with the required transfer fee. These documents will be executed for the sale to be ﬁnalized.Post-Sale RequirementsIn addition to the post-termination obligations outlined in the Franchise Agreement you signed with Franchise Services, Inc., the buyer will, in almost all cases, have you sign a non-compete agreement as well.Informing the EmployeesAfter closing, a meeting is usually held at your facility so you may explain to your team what has transpired and introduce the buyer. You will most likely work with the buyer following the close and during the transition to help them acclimate to the daily operations of the business. This will be for a length of time that both parties will have agreed on. The buyer will need to attend University for new franchise training in Mission Viejo, California. After new franchise training, the Franchise Services, Inc. support team will provide ongoing support.Support and TrainingAny agreed-upon training or support will need to be provided during the transition period. Often the seller will make themselves available for an extended period of time for basic questions following the transition period.Wrapping It All UpAs you can see, selling your business involves a signiﬁcant amount of work. Please know we are here to help in any way we can. From working with a qualiﬁed buyer to their initial training we can provide any number of resources. Don’t hesitate to reach out for advice, direction and assistance as you navigate through this next step in your entrepreneurial career. Good luck and thanks for being a valuable part of our franchise network.

Franchise Resale Guide 5 29 19

Page 1

Page 2

Page 3