Last Updated: Jan-06-2017
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.
Why your exit strategy is important
The term ‘Exit Strategy’ is defined as: The methodology that a business owner intends to use to get out of an investment that he or she has made in the past.
For so many franchisees today, the notion of a planned tactical approach to ‘cashing out” is often an after-thought once they have been running their small business for a while. In today’s market, many of those franchisees thinking about their exit strategy are considering it because they are struggling. Even if this is not the case, having a plan in place including “end game” goals, process and steps needed to achieve those goals and finally, an initiative to trigger once you are at the final stage of exiting, via selling their enterprise, is a necessity in order to transfer ownership smoothly.
Let’s face it. Most franchisees buy their business with great hopes of success and are likely thinking they will build it up and sell it for a profit. But in reality, these thoughts go by the wayside when the reality hits of the day-to-day grind of running the business.
In the event the business is profitable, the process of planning an exit strategy at the “eleventh hour” is of course much easier…as it involves simply putting into play a “to do list” in the short term, that includes all the ‘house-keeping’ tasks of being up-to-date on all requirements and upgrades etc. that are required by the Franchisor, and understanding the costs involved ( like the transfer fee and a brokers success fee) . Another possible cost could be the purchase of an Opinion of Value. This will provide the seller the knowledge needed to confidently price the business to efficiently sell for the highest possible sales price in the present market.
The other time-consuming, but relatively simple task list, includes pulling together the most up to date and comprehensive due diligence package that you will need to share with all perspective and qualified buyers. If this is done BEFORE going to market it can take the headache and stress out of moving a transaction forward once you start qualifying buyers.
So we covered the most obvious tactical steps….even if you are not cashing out as part of a long term goal being met… but again the most important part of the exit strategy is by far the planning phase in the very beginning.
- What do I want out of this endeavor?
- How much do I need to sell the business for in order to meet this objective?
- What do the next 3, 5,7+ years need look like in order to achieve this?
- As you get close to your “planned exit date”…and your financial objectives are not met…..What is a counter balance to this unmet goal? Perhaps you decide that you will finance the incoming buyer and earn in interest in lieu of a higher sales price.
We have only touched on a few things to think about regarding planning an exit from business ownership, but this short exploration certainly underscores the idea that having an exit strategy whether you are ready to sell or not….. is in your best interest in the long term.
Tips for selling your franchise
Are you a franchisee who’s ready to sell your business? Maybe you’re ready to retire or eager to finally travel the world with some of your hard-earned profits. Or maybe you’re tired of the partnership with the franchisor or with managing members. Are you burned out? After operating the franchise for years, maybe it’s just time for a change to fire up your interest in some other areas of business.
Nonetheless, the first tip for selling, whether for retirement or simply a loss of adequate cash flow, is to leave emotions out of the equation. Selling is sometimes unavoidable, such as for illness or family emergencies. But in most cases, a re-sale can be and should be based on an economic advantage to the seller. This means planning ahead of time to sell when the economy promises an adequate return on your investment largely based on market demand rather than personal impulse or emotion.
This does not mean, however, that personal factors won’t weigh upon the decision to sell. Of course they will. But the second tip found in the fortune cookie of re-sales can be summed up in one word: Preparation.
If you take a deep breath, slow down, and pace yourself, you’ll have the time to prepare adequately. During preparation you need to reach out for help. Start with a professional real estate broker, your lawyer, an accountant, or a professional re-sales company that can help set you up with a buyer who has been screened to meet your specific qualifying criteria. A company like Franchise Re-Sales, LLC or other transfer-assisting companies can take much of the stress out of the sale by personally walking with you through the preparation steps. These steps aren’t nearly as daunting when a friendly pro is just an e-mail or phone call away, and there are many steps to consider.
The first step is to feel the pulse of your business in relation to the market. What is your business worth? To figure an accurate valuation, you’ll need to enlist your accountant. To provide your accountant the data for an accurate valuation, you’ll need properly managed books. In preparing for a re-sale, particular care should be taken on ensuring that the year immediately prior to the sale is up to industry standards. This means the franchise bank accounts are properly reconciled with bank statements, tax reports, and the company’s yearly or quarterly financial statements. When all of these variables match, this reinforces the financial certainty of the buyer that the valuation is based on solid figures. Proper books also include access to original invoices, receipts, and other tangible records.
Another step of preparation includes an answer about seller financing. Will you provide it? On what terms? Maybe your franchisor or a broker could assist you on developing a plan upon which everybody can agree. Your banker might offer some tips, also.
Of course, there is probably a transfer fee that you’ll be required to obtain for the franchisor in covering administrative costs, as well. How much is that? Can you include it subtly in the selling price or do you wish to ask for it separately? Are you going to pay it with your own funds? These are points of preparation, because without this information you can’t possibly set an accurate price on your business. For example, the buyer will need to know if you’ve skipped on necessary upgrades or if you already invested them in the business prior to listing.
Preparation also involves setting your own standards of conducting business, so that everyone understands the expectations, especially for buyers needing seller financing. You don’t want a buyer to be so loose on managing principals that the franchise flops, causing a default on your lending of the loan. This means you should also review what standards the franchisor has already set, to avoid wasted time through redundancy.
You also want to avoid the appearance of hypocrisy. Live up to the same standards you demand from a successor. Clean up the place, tidy the parking lot, and make sure your employees are neat, groomed, and dressed appropriately. Your face is on your business, so give a good presentation.
Finally, in between all of your preparation, as you get closer to “seller ready” time, research and learn about aspects of a re-sale in general. Study what franchisor “First Right of Refusal” means, because it serves no purpose to do all of this preparation just to have your franchisor use this clause to scoop up your business. The same attention should be paid to the clause that allows franchisors to exercise the “Right of Approval,” by denying rather than approving your buyer. Training or other requirements might also be costly to your buyer and might make your price unreasonable. If you prepare and learn about these things ahead of time, without emotional pressures influencing your choice to sell, the decision will be more advantageous in the long run. You can do this by asking the pros to help long before you’re ready to re-sell and by performing the due diligence necessary to any business agreement. The more time you spend preparing, the less you will wait for action upon the new goals or adventures which now capture your interest.
Steps to selling your franchise resale
Once you decide that you would like to sell your franchise business the first step is to inform your franchisor of your decision. They may be able to source a purchaser for you, though most will charge a commission fee for this.
Any potential purchaser will require a whole range of information about the business before they are in a position to discuss a price with you. This information should be provided in a Prospectus of Sale and should include:
- A description of the franchise, what it does and how it works
- Potted history of your business
- The sales history and adjusted profit history
- Details of any property
- Details of any staff
- Details of any equipment
- Copies of 3 years of accounts and up to date management accounts
- A realistic asking price
The Prospectus is your sales document. Whilst it is designed to sell the business, it must represent an accurate view of what is being offered and must not contain any misleading or false information.
Once a potential purchaser has been found, before providing any confidential information, you should arrange for them to sign a non-disclosure/confidentiality agreement. Once signed, you can provide your Prospectus of Sale and other supporting documents and commence negotiations. At some stage in this process the prospective purchaser must meet the franchisor to be approved as a prospective franchisee. You should agree with your franchisor when they wish to do this.
Once agreement in principle on the purchase of your business has been reached between you and your purchaser you should exchange emails confirming the offer for the business and your acceptance of this offer.
Attorneys will usually be needed to complete the legal transfer of the business in question and, though this is not always necessary for small value resales, it is good practice to always speak to an attorney before deciding. It is important however to only use an attorney who has experience in the resale of franchises.
Exchange of contracts usually takes place prior to the franchisor’s training course for the new franchisee and will usually occur the week prior to the course. This however is not set in stone and will vary from franchisor to franchisor. You should confirm this with your franchisor.
The purchaser must usually attend, and pass, the franchisor’s initial training course. If for some reason they are unable to attend training or fail to pass the assessment then the sale may not complete as it is likely your franchisor will not allow them to take on the franchise without training.
Prior to completion of the sale you may be required to instruct your attorney to give an undertaking for the payment of any outstanding fees, commission charges etc for which undertakings have not previously been given.
All suppliers or providers of leased equipment will need to be notified of the impending transfer in time for the new franchisee to be able to set up credit accounts with them so the business can proceed without pause once completion takes place. Discuss this aspect with your franchisor.
Without the relevant legal undertakings throughout the business transfer process, transfer of ownership may not be authorised by your franchisor.
Completion is the day that all relevant funds are transferred and the new franchisee takes over your business. This usually is straight after the training franchisor’s course.
You may well be required to attend the business during the first week or so to introduce the purchaser to your customers and possibly be on call for a few weeks thereafter.
The entire process can be stressful as most people only buy and sell a franchise once. You may consider using a franchise broker to manage the process with you and to take some of the day to day hassle away whilst you focus on the continued growth of your business during the resale process.
Making your business 'Saleable'
Without exception, no aspiring business owner should actually take the plunge without a clear vision and goals for selling or cashing out of the business at some point in time. Even those owners who intend to pass the business on to family members should manage the business as if they are going to sell to an independent third party.
So what does a successful business owner need to do in advance and what practices must be a part of the daily routine to make a business saleable? Below are four key considerations:
1. No business can be sold successfully without accurate and complete financial statements for at least three years (profit and loss statements and a current balance sheet).
2. Know what the business is worth. I strongly encourage all sellers to consult with their accountant and attorney prior to putting the business up for sale. In addition, if possible, speak with others in the same franchise organization or industry who have sold their business or bought an existing business to determine how they arrived at a selling/buying price (e.g. a certain multiple of free cash flow, or “EBITDA”).
3. The business operation should be “clean” and free of confusing or unreasonable expenses. Examples of such expenses include paying relatives unreasonably high wages or for work not actually done, using company funds for personal expenses, mixing personal and business debts to operate the business.
4. The management structure of the business should be such that the new owner can either step in and assume day-to-day management of the business or hire a manager at a competitive salary while earning a reasonable paycheck and profit. The business will not be very attractive if the new owner will have to make wholesale changes to achieve profitability and efficiencies.
In addition to the above, it is very helpful if you can paint a clear picture for the buyer regarding what the business can look like in one, two and five years with competent leadership and management. You need to be in a position to coach the prospective buyer in this regard. Finally, have a plan that you can share with prospective buyers to retain key personnel and ensure an easy transition. Giving a buyer that peace of mind carries an “emotional value” that will allow you to get a premium for your business.
Why the franchisor needs to approve the buyer
A franchisor’s best asset is a team of good franchisees. As a franchisor hopes to expand their business enterprise by increasing the number of franchise locations, it would serve little purpose to open new franchises if the franchisee’s failed a few months into operations leaving the franchisor with a huge administrative expense.
In addition, the franchisee needs to be experienced in management, have a good credit history, and be capable of learning the normal operating procedures.
Therefore, the only way of ensuring a high success rate for the overall franchise business is to screen applicants for approval prior to signing a franchise agreement.
franchiseresales.com – the only website dedicated to franchise REsales
FranchiseREsales.com is the only website dedicated to the REsale of existing franchised businesses, offering an unrivalled opportunity to promote established franchises for REsale to suitable buyers. With over 50% of buyers preferring to buy a franchise Resale first, franchiseREsales.com provides the ideal platform to promote franchises that are ready to change ownership. And approximately 10% of franchise owners would consider reselling their franchise if there was a practicable marketplace for REsale. On the site buyers can browse franchise Resale opportunities by location and connect directly to the sellers without anyone else in between.
FranchiseREsales.com is in partnership with MFV expo, the largest franchise Expo company in the US and benefits from the reach and brand recognition, MFV enjoys. In addition, FranchiseREsales.com has the support of the International Franchise Association (IFA) ensuring industry-wide promotion and presence.
FranchiseREsales.com strives to deliver a better-informed candidate to the sellers of a franchise for Resale by including free educational elements, access to free online expert panel and additional brand information in the form of franchisee stories. In addition free advice on how to value a franchise Resale and how to best promote a franchise business for Resale. All this we believe helps create a more informed prospective buyer for a Resale franchise as well as providing increased exit opportunities for existing franchisees.
We are very aware that Franchisees have a life cycle and when the time is right almost all will want to sell their franchise. We work closely with Franchisors or Franchisees and help promote their established businesses for sale to help find the right motivated buyers to take over the business and deliver better results and realize the full potential of the business opportunity.
FranchiseREsales.com is making an impressive impact to the US franchise market and its principals have over 18 years experience in the franchising industry, specifically online marketing since 1999. Franchises for REsale significantly benefit the franchise industry and the US economy encouraging more entrepreneurs to open new franchises with the knowledge that they can offer their franchise for REsale when the time is right.
“Frachiseresales.com has generated great interest for us and we’re delighted with the service they provide. While the number of responses is important, we’ve also been pleased with the quality of the candidates who convert from initial inquiries to the application stage. If you have re-sales in your franchise system, I would highly recommend them.”
Marty Welch - VP franchise Sales – Cellairis
“ In qualifying and managing new franchisee prospects for the current Home Healthcare franchise resale that I am managing, I have been impressed and very satisfied with the quality of leads that have been forth coming via FranchiseResales.com. They do a great job promoting this business opportunity for sale in a professional and compelling manner and connecting me with the potential buyers.” Dan Chomko, President. EMK Advisors, Mergers and Acquisitions.
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What Advantages does an opinion of value provide?
Often, valuations are prepared by a member of the Appraisal Institute (MAI), using an industry-specific process, producing a formal business valuation or “appraisal”. In this instance, in order to ascertain a value, appraisers use a variety of data including: replacement costs, market data, and sales comparable data. Usually, the certified appraiser acquires data directly from the business brokerage professionals within that specific market or industry specialty.
Business owners requiring an opinion of value, but who do not require a formal appraisal, can engage an experienced professional business broker. The broker completes what is known in as a Broker’s Opinion of Value (BOV). In today’s world of distressed sales, lenders will often seek both a formal business valuation and a BOV in order to best determine and understand current value. BOVs are usually favored for the purpose of determining a sales price.
When a broker performs a BOV, the broker gathers information regarding the business’s physical features and those of the surrounding area, and reviews the market for recent comparable data. They may also assess the market for similar businesses in the area that are for sale. In the case of a franchise resale, the broker would very likely use sales data from recent franchise resales within the same brand. The broker will also evaluate leases and property expenses. Market trends are also considered along with any of the businesses unique qualities.
How to value a franchise REsale
When your company is being valued for sale, several factors and valuation methodologies will be considered before determining the selling price. They will fall into 3 general categories:
Asset Value: Determining the value of the assets of a business can be done in one of two ways:
1. Add up the value of all assets the business owns (such as real estate, vehicles, plant, equipment, computers, cash, etc.) and subtract all liabilities.
2. Figure out the liquidation value, the estimated amount of cash you could raise if you sold off all the assets today, and subtract all liabilities from that amount.
The liquidation value is likely to be lower, depending of course on the current market value for the assets the company owns.
Earnings Value: An earnings evaluation is usually taken to determine what the business can reasonably expect for future cash flow. Once this figure has been reached, the estimated future business expenses are subtracted to determine the company’s projected net profit.
Arriving at an accurate earnings value can be difficult because you cannot predict with 100% certainty future revenue growth. This is often where the business owner is quite a bit more optimistic than an outside observer. The evaluator will look at past earnings, average annual growth/decline, present market conditions and trends, the overall stability of the business itself, and any other relevant factors depending on the specific industry.
Market Value: A market valuation of a business is similar to estimating the market value of a piece of real estate. In both instances, comparable recent area sales are used to arrive at a price. The challenge with valuing a business this way is that there are usually not enough recent sales of comparable businesses in the area to provide a reliable figure. But market value can still play a role in the overall business valuation.
After the business evaluator is able to consider net assets, net earnings, and market value, they are able to come up with an amount that the business owner can reasonably expect to sell for. Of course, whether the owner will actually receive this amount always depends on current market conditions at the time of sale but the business valuation gives the owner a realistic expectation going into the process.
Ryan Gipple, Principal – Ryan Gipple was born and raised in the Midwest where the importance of hard work, integrity and communication were instilled at an early age.
He graduated Suma Cum Laude with a Finance Degree from the University of Colorado and holds a Graduate Banking Certificate from the University of Washington (Pacific Coast Banking School), where he also graduated with honors.
After completing his formal education, Mr. Gipple spent the next 18 years in the Financial Services Industry (Private Banking, Small Business Banking, Mortgage Banking and Retail Banking). His progression up the corporate ladder was culminated with the position of Regional President over a five state region for a national banking franchise.
Ryan has been valuing, preparing and helping entrepreneurs exit their business for the last 5 years in his current role. He has both owned and operated small businesses and franchises and has helped hundreds value and exit their small business or franchise through third party sales. In addition, Ryan has been on the lending side of small business acquisition transactions which provide an unparalleled look at small business valuation and the intricacies involved in accurate valuation. He has also been a primary provider of “broker price opinions” for a nationwide re-seller of franchises.
Ryan was recognized in 2010, 2011 and 2012 by the Arizona Business Brokers Association for “Outstanding Performance” in the number of businesses sold. Mr. Gipple currently serves on the Arizona Business Brokers Association Board of Directors as the Treasurer and is a member of the Arizona Society of Practicing Accountants. He is also holds a current Real Estate License which is maintained through West USA Realty in Phoenix Arizona.
Whether you are a corporate executive looking to transition to the incredible world of an entrepreneur, or a current business owner reviewing exit strategies, Mr. Gipple is uniquely qualified to help.