What You Need to Know About Selling Your Franchise
August 4, 2016
Here are some of the factors to consider when selling your franchise
Preparing an exit strategy is a difficult aspect of owning a franchise and a decision many owners don’t fully consider. According to a recent Securian Financial Group study, more than 60 percent of business owners do not currently have or plan to develop an exit strategy. This is an issue because every franchise owner’s goal is to capitalize on the years of time and effort put into the business to build its value as an asset.
However, as franchise owners spend a large majority of their time running the business, it is not surprising that little attention goes to to thinking about what will happen to both the business and to them personally once they are ready to move on.
Exit strategies do not get enough attention
Exit strategies are important because selling your company may account for a large share of the ROI you receive from owning the franchise. There is a stark difference between investing in the business to build its value by structuring it for optimal profit and minimal tax burdens than it is to position it to maximize its sale as an asset over time. This can be potentially damaging to the business sale value because it does not take the prospective future buyer’s perspective into account.
“…your exit strategy should be part of your business planning process right from the beginning…”
For example, a business with largely transactional sales versus one focused on relational sales will have serious questions about the continuity and sustainability of the business model after the owner exits. Any question about the sustainability of future profits will drop a buyer’s valuation. Other reasons that may reduce a buyer’s valuation involve franchises that are too dependent on indistinguishable commodities, businesses in markets with limited potential for growth and ones that are dependent on a select few clients, to name a few.
Key considerations prior to sale
Buyers want to know the demand for the products and services, the trends in the industry, the structure and complexity of the business model, personnel needs and various other aspects that could impact the bottom line in the future. Furthermore, a buyer will have a target price point for the franchise, and it may be entirely removed from what you perceived. The key is that a buyer may heavily weigh his valuation on a franchise’s multiples and EBITDA. Earnings before interest, taxes, depreciation and amortization are indicators of a franchise’s financial performance, current and in the near future. Multiples, which refer specifically to the multiple of the franchise owner’s benefit or adjusted net, indicate the strength and profitability of the franchise after the owner’s salary and various other expenses, interest and depreciation. The Franchise Agreement will indicate whether the approval of the franchisor is required to transfer the franchise. Other considerations include franchisee training and fees to be paid upon a transfer. If there is a lease of office space or a store location, the terms of the lease may require landlord approval of an assignment of the lease.
Long story short, it is crucial for you to work with an attorney experienced in corporate transactions to gain a better idea of the types of multiples potential buyers look for based on the market demand.
The sales process
The importance of the exit strategy comes when an owner receives an offer, which can be anytime. This is why franchise owners need to be prepared for an offer that may push them to sell. According to a BizQuest report, in the event of a sale, typically this acquisition process involves 12 steps for franchise owners. These include the Letter of Intent, Purchase Agreement, due diligence of both parties, the franchisor’s introduction to the buyer, Franchise Disclosure Document, the buyer’s investigation, escrow process begins, Transfer Fee, New Buyer Franchise Agreement, escrow ends, new owner training and orientation and the transition process begins.
Acquisition processes can happen quickly and unexpectedly if the offer is right. To avoid a rough transition into your exit strategy, sit down with a franchise attorney to walk through a potential sale and take the steps to maximize the business valuation.
The advantages of selling a franchise
Franchise owners have an inherent advantage over other business owners in acquisition processes because franchisors closely monitor them. These parent companies audit the franchise’s performance to remove the chance of large spikes or drops in revenue and expenses. Franchisors understand exits are vital aspects of their value proposition, so they are more than willing to work with you to ensure your acquisition price and valuation are at peak value – if for no other reason than to make the franchise attractive to top prospective owners in the future. But a key aspect to remember is that franchises are in a network of other franchises – like a Dunkin Donuts franchise, for instance – which provides them with comparable valuations in similar markets.
Most franchise owners spend 99 percent of their time running their businesses and no time planning an exit. However, what we can see is just because your business is profitable does not mean it has value – at least not what you’d expect. Many franchise owners fail to realize that by focusing solely on business growth, they could cost themselves at the negotiating table. It is crucial for owners to work with an attorney to develop a proactive transition plan years prior to sale.