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Planning For The Eventual Sale of Your Business

All franchisees develop and evolve during their time within a franchise. The purpose of recognizing this is not only to be able to react to their needs and wants, but also to plan their eventual exit from the system thereby making way for new franchisees to purchase a resale opportunity and develop it further.

Understanding the franchisee life-cycle is critical to the success of a franchisors network. All franchisees develop and evolve during their time within a franchise. The purpose of recognizing this is not only to be able to react to their needs and wants, but also to plan their eventual exit from the system thereby making way for new franchisees to purchase a resale opportunity and develop it further. This article moves on from that to highlight the key elements required for a successful resale and to discuss the franchisors role within that process.

In considering franchisee resales franchisors really have two clear options for involvement. The first is to fully engage with the resales process by having a structured process they manage themselves or alternatively by appointing external consultants to provide and manage the process for them. The second option is to adopt a totally hands off approach, letting the franchisees simply get on with it and only becoming involved at the stage of approval (or not) of the proposed purchaser. An area to avoid altogether is to dabble and provide parts of the process, which is a recipe for disaster. My recommendation, based on practical experience over 27 years in the franchise sector, is to adopt the first option to either outsource the process or manage it in detail yourself. I believe it is the responsibility of every franchisor to support their franchisees during their lifetime within a particular franchise system. This especially applies during the emotionally vulnerable stage of selling and exiting.

A successful resale of a franchisees business is one that is planned and structured. One that can be seen to be the logical conclusion of a successful business plan clearly demonstrating to a potential purchaser what it is they are buying, how the value is generated and what benefits they will accrue from taking over and developing the operation. Clarity, honesty and openness are crucial to successfully sell a business. On the other hand lack of information and inaccuracies usually lead to frustration and dispute which can result in the sale collapsing.

The old training adage - Proper Planning Prevents Poor Performance - certainly applies to franchisee resales. The more preparation a sale has the easier the negotiations and legal completion processes are. Most sales that collapse during the process do so because either the information provided was inaccurate or it wasn’t provided at all. This results in frustration, dispute or the purchasers simply getting fed up and moving on to something else. It is important therefore to approach the preparation for a sale with the mindset of the purchaser. What will they want to know about the business, what information supports the price being asked and what issues or challenges are there which require consideration?

The ideal time to start planning for a sale is two and three years in advance giving time to ‘polish’ the business and present it in a strong and positive light. This applies both to the physical side and the financial side of the business. Home based or “man and van” operations can take less time to prepare for sale than premises based ones but the planned approach should still be adopted in both cases.

Consideration must be given to; the presentation of premises, cleanliness, decoration, showing the franchisors latest corporate image, carpeting, sound utility services, in fact anything that if wrong might make a prospect think “I don’t fancy owning this.” Impressions count and purchasers mostly want a simple take over process not one that is fraught with upgrades and improvements. The same applies to any production equipment involved in the business. A seller cannot expect a purchaser to pay top dollar for a business where the physical and production elements have been run into the ground or simply not properly maintained

A major factor in premises based businesses is of course the property lease. So part of the preparation must be to ensure the lease is transferable and the purchaser will have security of tenure on an on going basis. Early discussions with landlords are all part of the sale preparation process. An expiring property lease can be considered a liability to a successful sale. Incidentally so are vehicle leases that are about to expire and mean the purchaser has to source replacements early on in their ownership. In all cases the presentation of an ‘easy to take over’ business is key.

Staff stability is also an important factor. If a business can continue to be run by the staff without detailed owner involvement, it makes the purchaser that much more confident they will be able to at least maintain the previous owners performance. This makes the take-over a smooth and easy process and adds value to the business. Contracts of employment should be in place for all staff. The purchaser is taking on staff obligations under rules on business transfer and will need to have full details about what these obligations are.

How the finances are presented will have a major effect on a businesses valuation. Quite often accounts will include expense items which would be unique to the seller and which will not relate to the on-going business operation. These could include pension contributions, vehicles for family members, personal costs included as expenses etc. These must be taken out and identified in the Sales Prospectus for the business thus enhancing both the profit level and the proposed value.

Other issues which often need to be taken into account are those of a single large client or customer contract which will require renewing at some stage - both can have a negative effect on valuation and may deter potential purchasers.

All of the above illustrates the type of preparation needed for a successful sale and why time and effort should be put in to prepare and present the business in an attractive manner.

Having taken the time to prepare the business the detail is captured in a Prospectus of Sale. Franchisors, or external consultants, should provide this to franchisees in a pro-forma style with key headings and guidance in place for the franchisees to complete. This upbeat and detailed document acts as the main information provider for the purchaser. Having spent a couple of years planning and preparing for the sale it is vital this Prospectus contains all the necessary information that will enable a purchaser to make a full appraisal of the business and provide the necessary detail to justify the asking price. It will contain a description of the marketplace, details of how the business has developed, details of sales turnover, staffing, lists of asset and finance leases as well as accounts for the last few (usually three) years.

With all the preparation complete and the Prospectus in place the business is now ready to be valued and the prospective purchaser is found.

Derrick Simpson QFP

Derrick has played an active role within franchising since 1988 as both franchisor and professional advisor. Derrick is a member of the bfa expert panel of assessors for the QFP qualification and has been a member of the Board of the bfa. He is a regular speaker at events on matters around franchise resales and is often asked by franchisors and other organizations to advise and consult on the franchise resales process and resales planning.

 

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