One of the least considered aspects of owning a franchise or business is preparing it for sale when the time comes. The reasons for selling your enterprise can vary a great deal. It could be because of a new venture, or change in direction, health, divorce, retirement or simply wanting to capitalize on the many years of hard work you spent building an asset with exit value. Selling an enterprise must be part of the overall strategy, from the very beginning, essentially, starting the business with the end in mind.
In my many years as a business broker and franchise consultant, I have often found that the exit event doesn't get the attention it deserves early on. It should, because that exit event can very well account for a healthy portion of the overall return on investment when everything is set and done. Buyers often make investment decisions solely on how fast and how much income a new venture could generate, a fact that doesn't take into full account the value of the asset that can be built over time.
Similarly, sellers structure their business operations in a way that maximizes profit and minimize the tax burden. These are both worthwhile endeavors, but quite often omitting the view from the buyer's perspective. One important consideration for sellers, for example, is to strive to create an environment of continuity and sustainability for the business when they are finally out of the day to day picture. That can go a long way in the eyes of a prospective buyer, translating into potentially higher valuations.
Sellers should bear in mind that when prospects are considering an investment in a franchise or business, they are typically evaluating the demand for its products or services, industry trends, complexity of the model, and people requirements, among other things. They also typically have a preconceived notion of how much they want to pay for it. That is why prudent sellers need to also investigate and have a good idea of the type of multiples that the enterprise can be valued at based on market demand.
Having a realistic expectation of the valuation for the enterprise is important in any negotiation. The flip-side to that can either be undervaluing or overvaluing the enterprise. The definition of a multiple is simply the multiple of the owner's benefit, also known as the Seller's Discretionary Earnings (SDE) or Adjusted Net. It is basically the profit a business shows after re-casting the financials to account for customary Add-Backs such as, owner's salary, one-time expenses, discretionary expenses, depreciation/amortization, interest, etc. There are various sources that provide "comps" for the multiples to be used in a specific type of business, as well as professional Business Brokers who can be very helpful in navigating through a valuation process. In the case of a franchise, the Franchisor would often have a pretty good idea as well of what the multiples look like, based on previous re-sales in the system.
Owners of franchises often have a bit of an advantage when it is time to sell. That stems from the fact that a franchise, by nature, is monitored and audited by the Franchisor. That fact results in less uncertainty when it comes to revenues and expenses. There are also more opportunities for prospective buyers to validate the financial model and do due-diligence by working through a parallel investigation with the franchiser, and also reaching out to other franchisees in the system. In addition, the franchise is part of a network of franchisees who often act as a defacto marketplace for re-sales when they want to expand and add on to their own operations. World class Franchisors understand the importance of helping their franchisees exit gracefully and with the highest valuations the market will bear. They understand that the exit event is part of their value proposition, a way to ensure that top quality candidates will continue to be attracted to their model.
Overall, when owners of franchises or businesses are preparing and planning for an exit event, they need to consider some of the following questions:
Does my business or franchise have the appropriate level of staffing that allows the new owner to just replace the current owner? Or does the new owner need to hire additional personnel to supplement.
If the new owner needs to hire additional personnel, what does that do to the SDE and the business valuation? Can current employee roles be expanded or modified to cover shortcomings?
Can I reasonably explain and justify all the Add-backs I am claiming?
Can my accounting books withstand scrutiny?
Especially in the case of a franchise, do I know enough about my Buyer and his/her financial viability so that I am confident that he/she will get approved by the Franchisor? Have I taken into consideration the impact of transfer fees and commissions in my asking price?
Have I taken into consideration the timing and sequence for the transaction, and have I budgeted enough time to accommodate the process?
A typical task sequence for a transaction after a buyer has been located, looks as follows:
1. Offer acceptance (Letter of Intent)
2. Purchase Agreement signed
3. Due Diligence completed
4. Franchisor notified, Buyer introductions (for Franchises)
5. Buyer Franchise Disclosure Document (FDD) review (for Franchises)
6. Buyer investigation/approval process (for Franchises)
7. Escrow process
8. Transfer Fee paid (for Franchises)
9. New Buyer Franchise Agreement signed (for Franchises)
10. Escrow Closes
11. New owner training by current owner and Franchisor (Franchisor involved if franchise)
12. Transition period begins
All prospective sellers should begin the exit planning process for their business way in advance, in order to maximize their business valuation. Anything short of that and you are in for a not-so-graceful transition.
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