BEEF UP YOUR VALUE PRIOR TO SALE: Thinking about selling your franchise? Some legal considerations before going to market.

Author:Bleiman, Andrew

Franchisees frequently make the mistake of seeking to sell their business before properly positioning it for sale. In so doing, sellers are often unable to command top dollar for their business in a sale transaction. To maximize value, a prudent seller should consider several issues before going to market.


Initially, if a seller does not own the property on which the business is located, it is critical that the seller fully understand the lease for the premises, including the significance of the provisions relating to the lease term and available option periods. A seller who is nearing the end of the lease term without option periods will not be able to demand as significant a value for the business if the buyer is in jeopardy of being unable to renew the lease for the premises. A seller should seek to obtain option periods or otherwise extend the term of the lease before marketing the business for sale.


Likewise, a seller should be aware of whether the lease contains problematic assignment or change of control provisions that might interfere with the sale. Despite a tenant&'s best efforts, in the excitement and eagerness of trying to get a deal done, landlords sometimes successfully incorporate detrimental terms into assignment clauses such as recapture rights, rent increases and provisions that permit the landlord to share in some of the sale proceeds, all of which may serve to inhibit a sale. To the extent such provisions are incorporated into the lease, a seller should try to amend or modify the lease to remove such adverse terms before attempting to sell the business.


Furthermore, the seller should assess the nature of any personal (or corporate) guaranties that might have been signed in connection with the execution of the lease. Because landlords will frequently require the seller to continue to personally guaranty the lease after an assignment, before the sale process begins, sellers should seek to terminate, modify or limit any existing guaranties. Where the landlord&'s initial investment in the premises (e.g. any tenant improvement allowance) has been recouped, the termination, modification or limitation of a personal guaranty can sometimes be effectuated.

This is particularly true where the tenant (seller) is executing an extension of the lease, increasing the security deposit or making capital improvements to the premises in connection with a reimaging or remodeling of the premises...

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