Selling a franchise involves some standard steps

Q: How do I successfully exit my franchise business?

A: There are several factors you need to take into consideration when selling.

Franchises are valued on a unit level based on free cash flow. For a national concept, a multiple is applied to that cash-flow number.

Let's say the multiple is six times cash flow per unit. If your units are averaging $100,000, that would mean each unit would be worth $600,000. If the franchise is a service franchise or a lesser-known concept, that number may be a multiple of four, not six.

Your first potential buyer is your franchiser, because almost every franchise agreement gives the franchiser the right of first refusal. The franchiser also has an approval right for any buyer, so approaching other franchisees in the system who want to expand is a good second step. The third source of buyers are franchisees of similar concepts.

The selling process is fairly straightforward: In most cases it will be an asset sale vs. a stock sale, and require certain kinds of reps and warranties, ensuring your financials are true and correct.

In regard to employees, you are obligated to pay out all owed benefits. If key employees have employment agreements or non-competes, reassure them that if they are not hired by the new franchisee, they will receive some kind of severance pay.

Be prepared to pay off all your liabilities, including your SBA loan. Calculate your selling price so you know how much cash you will receive after you pay off all your debts.

Tax also is a major consideration, and the allocation of the purchase price is key. Certain assets qualify for capital gains taxed at a lower rate, while other assets, particularly ones that have depreciated, are taxed at a higher rate.

While the main responsibility when selling your franchised units falls to you, remember that the franchiser has an obligation to help you. After all, it is in their best interest to ensure that the transfer happens seamlessly, so that the customers keep coming.

Dennis Monroe is a senior distinguished fellow at the University of St. Thomas School of Law, and co-founder and chairman of Monroe Moxness Berg PA.