8 Top Tips for Selling Your Franchised Business: A Franchisee Guide
8 Top Tips for Selling Your Franchised Business: A Franchisee Guide
It might sound strange, but you should begin to consider what the process of selling your franchise business will be like before you buy it! Seriously, becoming a business owner should include the forward planning that considers how long you will need to be in the business to maximise the return on your investment. We assist franchisees to enter quality franchise businesses every year, and one of the key points we talk about during the recruitment process is the ‘exit strategy’.
Sounds strange? Not at all.
Preparing for the sale starts from the moment you consider purchasing. This includes setting up your trading structure - will you require a family or unit trust, a partnership or a limited liability company to manage tax and wealth creation? It also covers your record keeping, financial reporting, employment structures, lease terms and MUCH more, as each of these will play a part in your ability to capitalise on your hard work ahead.
It’s not too late to prepare, even if you are already trading. But start NOW! Planning for your sale early means that when the opportunity or the need to sell arises, you will be ready.
We have 8 handy tips to position your business for the best outcome at sale:
1. Understand and demonstrate your value proposition
Know what you are selling and have details of:
Your customers, how you engage with them and why they are loyal to you;
The assets of your business such as equipment, fit out, stock, human resources and brand and marketing collateral;
The history of the franchise and your specific business - when you purchased it, green-field or going concern, details of previous owners and duration of operation;
Up-to-date licenses and permits required to operate the franchise business; and
The franchise agreement, leases and any legal documentation or legislation that your franchise business must comply with;
Many would say this is the most crucial component in a prospective buyer’s consideration: accurate trading and financial data. Try and present a minimum of 3 years to the current date, but preferably since commencement of the business. Knowing and being able to demonstrate your annual turnover, your cost and revenue drivers and your profit will directly impact both the saleability of your franchise and the sale price.
Meet with your accountant or business advisors well ahead so that your balance sheet and profit and loss statements are up-to-date, correct and ready to be subjected to the buyer’s and their advisor’s scrutiny. Even though you may have prepared a future budget or sales forecasts and may reference them during discussions, it is important that you do not make any representations to a prospective buyer about such projections or include such documentation without adequate waivers, in a sales kit or other information you give. This can have legal implications of being misleading or deceptive on the seller’s part post-sale if it is not achievable by the purchaser.
2. Preparing your franchise business for sale
You’ve seen the television programs that show you how important it is to make your home look as appealing as possible when you put it on the market. Just like selling your house, it’s important to present your business at its best. This means visually, operationally and financially.
Take a long hard look at your premises (or mobile unit). Like our homes we can become so familiar with the look that we fail to see the shabby furniture, tired paintwork, missing globes, and worn fixtures. Obviously you don’t want to make any major capital investments, but a thorough clean, some fresh paint, getting round to the repairs and fixing the little things that have lingered undone will make a huge difference. Give it back the love and sparkle you did when it was brand new and get your team invested in keeping it that way. Take a look at your team, their uniforms and personal presentation, and work with them to take renewed pride in how they look and act with customers and each other.
The visual presentation of your store and your team will be further enhanced by reinvigorating your operations. Again, this too can become a little jaded and ho hum. So examine your operations, systems, procedures, customer service, inventory management, employee engagement and cultural commitment and see where some training and incentives and your good example could uplift and improve performance.
Managing costs and boosting sales are the two ways in which you can improve your profit. A profitable franchise sells itself. First, look to any ways you can reduce your overheads: utilities, cleaning or other contracts, better rostering to reduce staff costs and managing waste better are just a few things to consider.
Then look to improving revenue. Many franchisors require or permit each franchisee to conduct local area marketing. It may be valuable to conduct some active, targeted marketing in your community to boost your sales in preparation for the sale of your franchise. Talk to your franchisor and they may help with marketing material or promotional assistance or even training and support.
3. Communicating with the franchisor, lessor and suppliers
The key parties in a franchise sale transaction are the franchisor, the lessor (if you are leasing) and any suppliers. Each of these parties generally have their conditions to sell or assign outlined in their respective agreements, so peruse them to familiarise yourself with the terms. Some of these may include:
Incoming franchisee’s/lessee’s financial position and resources in relation to their ability to
i) purchase and conduct the franchise,
ii) pay any assignment or other fees,
iii) provide bank guarantees or other warranties to secure their obligations under the franchise agreement, the lease, loans or supply, in their capacities as a franchisee and/or a lessee;
Incoming franchisee’s/lessee’s business experience;
Approval of the incoming franchisee by the franchisor (and possibly lessor)
If applicable for you as a franchisee or a lessee - to remedy any breach under the agreements and pay any amounts owing to the franchisor or suppliers; and
Incoming franchisee/lessee to receive training from the franchisor.
It is important to communicate effectively with the franchisor, landlord and suppliers to ascertain their requirements will be fulfilled.
4. Negotiating the sale price
There are some common methods to value a business:
- Asset valuation method
- Capitalised future earnings method
- Earnings multiple method – generally 2.5 - 3 times of EBITDA (earnings before interest, tax, depreciation and amortization)
- Comparable sales method that is price that similar businesses have sold for
There are two categories of factors that will impact the sale price - internal and external factors.
- Some internal factors are the duration of the franchise operation, your customer data base and the circumstances surrounding the sale - whether it is a well-planned sale or forced sale due to cash flow issues, termination, ill-health or death of a key person in your franchise.
- Some external factors that will impact sale price are sales of competitor businesses and their sale prices. This is a particularly important factor as a prospective buyer will generally have a purchase price in mind and would consider your competitor as well. Other factors include how your industry is trending in the marketplace and the wider economic conditions.
5. Find a franchise business broker
The selling process can be time consuming, complicated and stressful. It requires hands on project management to ensure that all parties (franchisor, lessor and suppliers) are on board. By using a competent and reputable franchise business broker, you’ll have the best chance of managing the sale process from marketing the opportunity to execution of all the documents and getting the proceeds in your bank account
Make sure you get testimonials from past clients who have worked with the broker. You could ask your franchisor about the best brokers they have been involved with in successful past sales. It’s important to engage a broker who is experienced with franchise re-sales rather than any business broker. Remember that unlike any business sale, the purchaser of your franchise will need to undergo the same qualification you did to be approved by the franchisor to enter the network.
The broker assists with:
- walking you through and explaining the sale process;
- pre-qualifying the prospective buyer including understanding their business and management experience, financial position, referees, background checks and credit history;
- ensuring that the prospective buyer understands franchising and is acceptable to the franchisor
- assessing the appropriate valuation method and best case scenario sale price;
- finding the buyers by advertising and marketing the sale of your business;
- negotiating conditions for the sale of the franchise, specifically getting guidance on what to compromise to ensure the best outcome for you; and
- Identifying and avoiding common pitfalls in a sale transaction
6. Speak to a franchise lawyer
The contract of sale of business has a number of important elements including restraints, training of the buyer, asset and price apportionment, accompanying documents such as the franchise agreement, disclosure document, leases, transfer of business names and permits, transferring employees and their entitlements, and tax implications (CGT and GST). We highly recommend having a lawyer handle the contract of sale of business agreement
A competent franchise lawyer will be able to assist you, hand in hand with a broker to ensure that all conditions are fulfilled, that the requisite consents are received and all agreements are executed correctly. Your lawyer will be able to advise you on any post-sale obligations under the contract of sale and any post termination obligations under the franchise agreement. Some of these post termination obligations under the franchise agreements may be that you return any copies of the operations manual, surrender the client list, as well as confidentiality and restraint of trade obligations.
7. Prepare for the physical handover of the business
You will need to prepare the franchise business for handover. Some of these tasks include:
- ensure that the premises is clean, orderly and operating in accordance with the operations and procedures manual;
- collate all staff roster and employment contracts that detail each employee’s job descriptions, skills and experience, resumes, pay rate, and leave balances and up-to-date superannuation and tax records;
- ensure that policies, procedures, permits and other statutory and regulatory requirements are up to date, such as Work Cover, Workplace Health and Safety etc;
- notify the buyer of any local area marketing that has been performed and its performance statistics (if available); and
- collate all supplier details including payment dates and delivery times
8. Timing of your sale and getting the best result
Timing is everything. The best time to sell is when you have options. That’s why it’s imperative to have your financial documentation ready, to understand the franchisors resale process and to ensure the length of lease remaining is sufficient to meet potential buyers finance requirements.
Waiting until there is a downturn in your business is not the right time to sell. You need the business showing positive growth and looking as good as it did on the first day of opening.
And here’s an interesting observation: many franchisees have followed these steps in point 2 - preparing your business for sale visually, operationally and financially. The results of the uplift they created to enhance their franchise to a potential buyer, so invigorated their business, their staff and their customers, they were motivated all over again and kept their business for a few more years.
So here are the 2 most valuable tips:
Think ahead to your exit when you purchase your franchise, setting it up and running it to build the maximum value for when you are ready to sell.
Maintain and operate your business as though it was always on the market as this will ensure you and your team keep on top of sales, customer service, store presentation, maintenance and financial performance. It also enhances its value to attract the widest range of buyers.
DCS GROUP has been providing end-to-end franchise consulting for 30 years. Their services include law, recruitment, branding, marketing and technology services. DC Strategy manage the franchise's commercial, legal and recruitment needs, and currently work with a wide range of leaders in the franchising sector.