“Earnest money” is what sellers call a deposit in the residential market. A real estate deposit is a buyer’s good faith payment showing serious intent to purchase, held in escrow until closing, then applied to closing costs or down payment. It’s usually 1-10 percent of the price and refundable if the deal fails due to contract contingencies. But it can also be forfeited if the buyer backs out without cause.
That makes sense, because the seller would have to take the home off the market for several weeks before the deal closes; the risk of losing the deposit is a powerful incentive for buyers to follow through.
Selling a business, especially a franchise, is different.
In most franchise resale transactions, a buyer’s deposit is refundable, no matter how long the deal takes to close. A buyer has to get approval from the franchisor, from the landlord, and from the lender, all of which often happen sequentially rather than fully in parallel. The landlord has no interest in reviewing a new lease agreement until the buyer is sure they have passed the approval process, which can take months. The lender doesn’t want to approve financing until close to the end of the process; understandably, since interest rates, the lender’s priorities, and the buyer’s financial position may change during the approval process.
But it can still be frustrating for sellers. Here’s what they should know:
The process takes time and involves risk for both parties. It’s frustrating to invest months in a deal, only to have to start over with another buyer with nothing to show for your time. But the buyer is taking risks, as well. They must sign an NDA before they get their first look at a company’s financials. They place tens of thousands, perhaps even hundreds of thousands of dollars in escrow, tying it up for months while the franchisor and landlord approve the deal. Both sides are facing large opportunity costs.
Non-refundable deposits reflect the nature of a home sale and are considered customary in the industry. That’s not the case with business sales. Real estate, especially residential, is tangible. You can walk through a property and get a feel for the neighborhood in just a couple of hours. There’s some diligence, of course: a home inspection, title search, and property survey. But it’s all relatively quick and requires much less investment than the due diligence process for buying a business. Buying a home is also a more emotional decision, one that can be affected by comparison shopping or simply changing your mind.
A franchise usually doesn’t offer many options in a market. You can decide whether to purchase a fitness franchise or a food franchise, but you usually can’t shop around the market for two options within the same company. A four-bed, three-bath home can be completely redesigned and can be compared to dozens of similar homes, perhaps in the same zip code. And home buyers are in control of the process, while potential franchisees are not.
Working with a broker can help keep the process moving and help the seller move on to the next buyer quickly if a deal falls through. It’s one of the advantages our company provides for a seller; buyers know that if they drag their feet, we have a couple more qualified buyers ready to start negotiations. That keeps buyers motivated and engaged. It also means less wasted time for a seller if a deal does fall through – they can begin to evaluate new potential buyers right away.
Most business owners have bought and sold more homes than companies, and that’s why we recommend they work with a business intermediary who understands the process and can navigate the ups and downs.
If we can help you sell your franchise, contact us here.
