Preparation Is the Key to Franchise Resales
There are many steps involved in selling a franchise business and maximizing its resale value.
As a business owner, selling your business is a normal part of the lifecycle of a franchise. New owners come into a system, operate for a certain period and then sell. There can be many reasons for a resale, including retirement, health, building a new business or other economic factors. What we do know is that all franchisees will eventually sell their business. The key to maximizing the value of a resale is preparation.
The mistake that some franchisees and franchisors make is not planning for an eventual exit from the outset of the relationship. Many owners focus on running their businesses in the moment and do not have a plan for how they eventually want to sell. In the meantime, they have put themselves behind the eight-ball in terms of maximizing the value of the business when it comes time to sell. There are a lot of things owners can do to position their business for a higher resale value.
It is important that a franchisor and a franchisee communicate about this subject early and often. Best practices often suggest that you begin thinking about the sale of your business about three years prior to placing the business on the market. However, I would suggest beginning to think about this from day one.
One of the prime reasons why successful businesses sell is health-related: The owner is unable to carry on and needs to sell. We never know when this type of thing might happen, so we need to heed the Boy Scout motto and be prepared. Owners should ask the franchisor what they should do to start preparing to sell the business. When it does come time to sell, having a solid plan in place can help sell the business faster, more effectively and at a higher price.
A quality franchisor is going to work with their franchisees to help them understand how to position their business for resale. They will also be motivated to maximize the value of the business and can provide guidance through successful strategies used in the past.
Some franchisors have a formal program in place to assist with franchisee turnover. In some cases, it may start with referral programs within the system to notify existing franchisees of an upcoming resale. That is a common practice, as many franchise resales come from within the system. Franchisees often look to scale their business, so if a franchise becomes available within a certain territory at a reasonable price, it will likely draw interest from other owners in the area.
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From the franchisor’s perspective, selling to a new owner from outside the system can be a positive as well. It is important to bring in new franchisees with fresh energy who are hungry and motivated and can raise the bar for everyone in the system. Although franchisors don’t want excessive turnover year after year, they know injecting fresh blood into the system is critical to how businesses evolve over time. By being proactive and working with franchisees on their exit strategy, they may avoid situations in which owners lose motivation, disengage from the system, and suffer poor performance.
Whether a franchisee sells to someone within or outside the system, it is important to have a plan in place well in advance. Those who sell their business in a quick or reactionary mode compromise their ability to sell for the highest value. Although it is ultimately up to the franchisee to determine the selling price, franchisors and/or third parties can assist by helping determine the business valuation.
One of the most important reasons to have a resale plan is that a franchisee will need to show two to three years of clean financial records. This includes things like tax returns, P&Ls and balance sheets. Since most successful businesses are valued on a multiple of earnings. The financials need to be clear and verifiable with a clear paper trail documenting why the owner has made key business decisions in recent years.
In some cases, the financials of a business may change slightly in the years leading up to a sale. CPAs often set up financial records to minimize an owner’s income and reduce their tax burden. However, when selling the business, showing a maximum amount of income is very important to increase the value of the franchise. Income should be fully recorded. Franchisees should not occasionally put cash in their pockets to avoid taxes. The value of that dollar is much higher than the tax savings.
Franchise owners will need to be able to state how much money the business made, how much money was taken out of the business and where it was taken out. Having clean, verifiable financial statements will give buyers the information they need and the confidence they are purchasing an organized and financially successful business.
In addition to documenting all the necessary financial information, franchise owners should tighten up any loose ends in the operations of the business when looking to sell. They should be aware of any under-performing assets that are negatively impacting profit margins. They need to monitor personnel issues, such as high employee-turnover rates, which may be viewed as red flags by prospective buyers. They should also make sure all the assets are well maintained and any necessary repairs are made. It is important that owners continue to operate the business with full effort and focus and not take their foot off the gas during the final stages before selling the franchise.
From the moment someone buys a franchise, the clock begins ticking to when they will eventually sell. Those who get the highest return on their investment are often the ones who have a resale plan in place many years in advance and work with their franchisor and accounting team to maximize the value of the business.