Franchisees choose to sell their businesses for a myriad of reasons such as burnout, personal circumstances, retirement or new career options. Regardless of the rationale behind exiting the industry, every franchisee should have a well thought-out exit strategy before they even make their initial investment in a brand even if they end up never executing it.
According to a report published by the Exit Planning Institute, approximately 6 million private businesses are operational across the country, accounting for over $30 trillion in revenue. Owners that have a vetted business scheme from entry to exit planning significantly enhance their chances that the brand will survive ownership changes and be sustainable in the long-term.
All current and potential franchisees, no matter if they oversee one or a hundred storefronts, should generate a written, detailed plan for either the sale of their franchise investment or the efficient transfer of ownership to a family member or trusted business partner. This is a big sticking point in the franchise model—mainly due to the fact that unlike independent small business owners, the potential sale of a given franchise is ultimately subject to the approval of the franchisor. That means the franchisor dictates the terms of the sale, which could include upgrading existing equipment or moving to a more lucrative location—all of which could be cost prohibitive for a franchisee eager to quickly exit the business arrangement. There are countless instances in which a pending sale was terminated because neither the selling or purchasing party was willing to complete remodeling mandated by the affiliated franchisor. Additionally, there are notable tax considerations that need to be factored into selling a franchise. Not having a valid exit plan in place can drastically impact the inherent value of your franchise when and if you decide it’s the right time to sell.
Where to Start?
Successfully navigating the exit process from a franchise can seem like an overwhelmingly complex process to navigate for a large percentage of entrepreneurs. No need to worry, the following is an overview of some proactive steps you can take to ensure you are optimally positioned for a smooth transition from your franchise.
- Consult with a qualified advisor who can assist you in generating an executable exit strategy. For example, our firm has years of experience serving the needs of small- and medium-sized businesses. We can guide you through all phases of the process from start to finish.
- Identify the main goal of the planned exit. For instance, transferring the franchise to a family member, selling to an external third-party, the franchisor, or private equity entity.
- Establish a realistic timeline for selling or transferring the ownership of your franchise interest—whether it’s between two to five years or even longer depending on your circumstances and long-term goals.
- Determine if you want to remain involved in the venture in a reduced capacity such as a consultant or retain a minority ownership stake. There are some potential buyers out there that want the selling franchisee to stay involved in the business operations for a certain period of time post-transaction in order to ease the transition whereas others prefer a clean and immediate break.
- Compose an itemized list of value-add items or actions that would boost the inherent value of the business when the time comes to solicit interested buyers. Relatively minor changes can oftentimes make a big difference in value.
It is important to manage your expectations beforehand. Selling a marginally profitable franchise can be a challenging task. Based on a study conducted by BizBuySell, only 20% of all businesses made available for purchase were actually bought. Finding a willing buyer on the open market can be a lengthy undertaking and you should budget your time and resources accordingly.
Coordinating Payment—Flexibility Pays
Seller financing is typically how business sales are conducted. The majority of potential buyers out there are hesitant to exhaust all of their capital to acquire the franchise. Some buyers additionally believe that a business should pay for itself and are turned off by a seller who requires all cash or who desires the carry-back note secured by further collateral or other forms of guarantees. Sellers often interpret these requirements as the seller having little confidence in the business or the buyer themselves—or both. The data, however, makes it apparent that sellers typically secure better offers if they accept terms. Market studies indicate that, on average, sellers who mandate all cash receive a disappointing 70% of the original asking price. On the other hand, sellers who are amenable to the terms offered by the buyer average an 86% of the asking price. To put that into perspective, if a franchisee was selling their business for $250,000 and are willing to accept the buyer’s terms would receive on average approximately $40,000 more than if they insisted on a cash-up-front transaction.
Get Organized, Stay Organized
Who is responsible for recording the financial performance of the franchise? Are the numbers vetted for accuracy? If the franchise has a dedicated bookkeeper, make sure they are accessible to potential buyers and that they are ready to provide a copy of the franchise credit report. Buyers will usually expect three years of financial data to inform their purchasing decision. This includes any applicable equipment contracts or property leases—anything that financially obligated the franchise is material to a future sale of the business. You should also have a thorough understanding of the collective franchise network itself as buyers will likely want to know how their peers are performing under existing market conditions.
What’s Your Franchise Worth?
The simplest and arguably the most reliable way of calculating the intrinsic value of a small business is what is often referred to as discretionary cash flow or the discretionary earnings method. This approach is premised on the actual earnings of the business and is dictated by the profit and loss statement. To determine the cash flow, you need to take into account the owner’s salary, perks, travel expenses, company vehicles and further discretionary costs. This collective cash flow is multiplied by a number applicable to the specific franchise category—ranging from two to four times the seller’s discretionary earnings (SDE). A trusted attorney or financial professional can assist you in settling on a listing price for your franchise.
We help business owners, including franchisees, determine their exit plans. Remember, you only have one opportunity to sell your business - make sure you do it right.
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Francine E. Love is the Founder & Managing Attorney at LOVE LAW FIRM, PLLC which dedicates its practice to serving entrepreneurs, start-ups and small businesses. The opinions expressed are those of the author. This article is for general information purposes and is not intended to be and should not be taken as legal advice.