Selling a Quick-Service Restaurant or Fast Food Franchise

Franchise unit or independent concept

The first thing a buyer asks is whether the location carries a brand. A franchise unit comes with a name customers already know, a supply chain, a menu and an operating manual. It also comes with a franchise agreement, and the buyer is taking over the remaining years of that agreement along with the equipment and the lease. An independent quick-service concept has more freedom and usually a smaller buyer pool, because there is no brand to lean on and the recipes and systems live inside the owner's operation.

Independent concepts sell on how well they could be repeated. A buyer wants to see written recipes, portion sizes, prep lists, opening and closing checklists and a clear way of training a new hire in a few days. If the concept can only be made right by the founder standing at the line, a buyer sees a personal business and prices it that way. Our post on owner dependency describes how to write down what you carry in your head.

What a buyer pays for

A buyer values a quick-service location on its earnings after a manager is paid a fair wage, which means your own pay is adjusted to what it costs to hire someone to run the store. The seller's discretionary earnings figure works for a single owner-operated unit, and larger groups of units are usually looked at on an EBITDA basis. Either way, the buyer starts from the point-of-sale reports and works backward to the tax returns.

Food cost and labor cost are the two lines they read first. Food cost depends on the menu mix, waste, portioning and the price the franchisor or distributor charges for product. Labor cost depends on how well the schedule follows the traffic. A store that staffs the same crew at two in the afternoon as it does at noon is paying for people to stand still, and a buyer who has run units before will see that within minutes of reading the weekly payroll.

Drive-thru, hours and traffic

If the location has a drive-thru, it is probably the busiest part of the business, and buyers will ask for the timer reports. Average time from the order board to the window, the number of cars in the lane at peak, and how many cars leave the line without ordering all say something about whether the store has capacity to grow or is already stretched. Many franchisors track these numbers and score the unit against others in the system. Show a buyer the same reports the franchisor sees.

Hours matter too. A store that opens early for breakfast or stays open late may have extra sales, and it may also have a late shift that loses money. Buyers will ask for sales by daypart so they can see which hours earn the profit and which hours only cost wages. A location with a drive-thru that is open late and has weak overnight sales may be worth more with shorter hours, and an experienced buyer will do that math without being asked.

Franchisor approval and transfer

A franchise unit cannot be sold the way an independent shop can. The franchise agreement almost always gives the franchisor the right to approve the buyer, and often a right of first refusal as well, which means the franchisor can step in and take the deal on the same terms. The franchisor may require the buyer to complete its training, pass a net worth and liquidity review, sign the current form of franchise agreement, and pay a transfer fee. The current form is sometimes different from yours, with higher royalties or a new remodel requirement.

Read the franchise agreement before you list. Find the term remaining, the renewal rules, the transfer clause, the marketing fund contribution and any remodel or equipment upgrade that is coming due. A buyer will find them, and a surprise remodel bill that appears in diligence usually turns into a price reduction. Rules vary by state and your attorney confirms what applies to your agreement. It is also wise to contact the franchisor's transfer department early, before you have a buyer, so you know the process and the timeline.

Buyers who already operate other units in the same system are often the best fit. The franchisor knows them, they have passed its tests, and they can run the store the way the brand expects. We usually start with that group, and then widen to qualified first-time operators. Our guide to buyer qualification explains how we confirm a buyer can close before they see your numbers.

The lease, equipment and permits

Many quick-service locations sit in a pad site or an end cap in a shopping center, and the lease matters as much as the franchise agreement. A buyer's lender wants enough term left to cover the loan, with renewal options at rents the store can carry. The landlord has to consent to the assignment, and the franchisor often has to sign off on the lease too, so two approvals can be running at once. See the lease is part of the deal for what that process looks like.

Equipment in a quick-service kitchen is heavy and costly. Fryers, grills, hood and fire suppression systems, walk-in coolers, drive-thru headsets, menu boards and the point-of-sale system all have an age and a service record. Keep the maintenance logs. A buyer who sees a cooler compressor replaced last year feels better than one who is told it works fine. Health permits, food handler certificates, signage permits and any alcohol or music licenses are checked as well. Some transfer with the business and some have to be reissued to the new owner, and local rules differ widely.

What tends to sink a sale

Most failed quick-service sales run into one of a few problems. The franchisor declines the buyer or takes longer than the buyer's financing allows. The franchise agreement is close to expiring and the renewal terms are worse than the buyer expected. Sales reported on the point-of-sale system do not match the deposits and the tax return. The general manager, who holds the crew together, quits when the sale becomes known. A deferred remodel turns out to be mandatory.

Confidentiality matters because the crew is the business. Employees in this industry change jobs easily, and a rumor of a sale can cost a store its shift leaders in a week. We describe how we market a location without naming it in how we market a business confidentially. Franchisors should be told at the right moment, usually once a buyer has signed a letter of intent, and your attorney can tell you what the agreement requires.

Getting the store ready

Start a year ahead if you can. Run every sale through the point-of-sale system and make sure the books tie to the bank deposits. Train at least one shift leader to open and close without you. Tighten the schedule so labor follows traffic, and track food cost weekly against a target. Pull the franchise agreement, the lease and the last two remodel invoices into one folder. Get the equipment serviced and keep the receipts.

If you own several units, think about whether to sell them together or one at a time. Buyers pay more for a group that comes with a manager in place at each store, and the franchisor may prefer a single new operator over several. When you want to see how a buyer is likely to read your numbers, the page on selling a quick-service restaurant is a good place to start, and a short call with us is the next step after that. At Business Advisors of America we work with owners from the first valuation through closing.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.