Last Updated: 19-July-2012
Practical advice for selling a franchise
Ideally, an exit strategy should be thought about from day one. It is important that there is a clear vision of what you want to achieve, and to maximise the value you get from the business it is essential to think about how you’ll leave it further down the line. The franchisor includes terms of exiting the business in the franchise agreement and careful exit planning will help you to maximise the value of the business when you come to sell it, if you choose a time when the business is doing well and there are advantageous market conditions.
There are always many factors to take into account in making the decision to sell but unfortunately several of these are likely to be outside of your direct control. The primary objective for the majority will be to achieve the highest possible price for your business and you might need to think twice about selling if the economic situation is uncertain. However, it is also important to remember that there will always be a market for any successful business.
The sale of a franchised business can take considerable time to complete and you should start looking for a buyer at least a couple of years before you want to exit and be prepared to leave earlier than you plan if a suitable buyer can be found. Planning your exit well in advance will ensure that you are prepared, and it is important that you identify any areas of weakness which the purchaser could use against you during the sale process. The objective is not to make cosmetic changes but actual operational improvement to maximise the value of your business.
When a buyer carries out their due diligence they are likely to discover any quick fixes that are unsustainable and there is no advantage in presenting an attractive business if it does not have the operating base to sustain the business sales and profits in the future. A common issue that often crops up during a business sale is the absence of a formal contract for a key employee, supplier or customer which could have been addressed before the sale process commenced.
Several factors influence the value of a business including the timing of the sale, however the most important aspect is finding a willing buyer who will actually pay for the business. Obviously if there are several people interested in the business it is likely that you will achieve a higher sale price. The financial position of the business when you decide to sell will be an important factor in the valuation. Current, recent and projected profits and cash flow are a consideration, as well as how good you are at controlling the business costs. Your business’ growth potential may also be a factor along with the asset base of the business and how full your debtor book is.
There are several methods of valuing a business and the most common is to base the value of a business on a multiple of future earnings. Businesses with a record of sustainable profits are often valued at a multiple of earnings with the profits adjusted for one off items or unusual income. Smaller companies are usually valued at a lower multiple than a similar larger business. Mature cash generating businesses can be valued in a similar way but based on the business cash flow. An asset valuation might be appropriate for stable businesses with significant tangible assets. The franchisor can assist by giving an indication of the sale price of similar franchise territories in the recent past. A potential buyer may use more than one of these methods to obtain a range of valuations however in the end placing a value on a business is a subjective process and will be subject to negotiation.
With any franchised business, the franchisor will have the ultimate say on whether the buyer is suitable to become a franchisee in their network and therefore they should be involved in the process at an early stage. You are free to find a suitable buyer yourself however the franchisor is likely to have a list of individuals who want to invest in the business and are waiting for a suitable territory. In many cases the franchisor will charge a fee if they find a buyer themselves. Another way would be to use a business broker to find a suitable purchaser of the business.
A broker will typically charge 10% of the business sale price achieved however will free up the seller’s time to concentrate on running the business. Finding a suitable buyer can be very time consuming and using a broker leaves you free to maintain profitability of the business whilst an investor is found. Using a broker will help to maintain confidentiality which is important as knowing that a business is up for sale may upset your customers and staff. Prospective buyers are usually asked to sign a non-disclosure agreement. Once a buyer is seriously interested you will become involved in more detailed negotiations. Once you have identified your preferred buyer it is essential to develop a relationship built upon trust.
You could also sell your franchise business to a manager or employee who already has a good understanding of the business and is therefore likely to be attractive to the franchisor because of this. Clearly if the exit planning starts at an early stage you may well have identified someone within the business who has the potential to take over from you when you decide to sell. Remember selling a business will be easier if you can build a strong client base, show year-on-year profits, maintain premises and assets in good condition and recruit a high quality team around you. Once the initial sale terms are agreed the buyer will review the commercial aspects of the business such as contracts, staff and key customers to ensure that the claims you made about your business are accurate. This process is known as due diligence and will also cover the business past and forecast financial performance, as well as legal and tax compliance issues. A sale agreement is then drawn up which contains the exact details of the sale for all parties to sign, ensuring that the final agreement is acceptable and contains no hidden surprises.
Maintaining close contact with your professional advisors such as your bank manager, accountant, attorney, broker, and the franchisor is important throughout the sale process. It is vital that you retain focus during this time to ensure that the business continues to be driven forward despite the distractions of the sale. Selling any business can be a stressful time but careful planning and preparation can assist in achieving a successful sale at a good price.