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Franchisees Need To Have An Exit Strategy

September 7th, 2018 · No Comments

Identify a qualified advisor who can aid in developing a formal exit plan. An advisor could be an experienced attorney, financial advisor or accountant, who can assist with the various implications and tax issues regarding the sale or transfer of ownership. Surveys of small business owners indicate that their CPA is considered the most trusted advisor.
Establish the primary exit goal, for example, transitioning to a family member, sale to a third party, the franchisor or private equity group.

Franchisees Need To Have An Exit Strategy

Ed Teixeira – Contributor
Relying on 35 years of franchise industry knowledge

Franchisees seek to sell their business for a variety of reasons including burnout, personal issues, retirement or new opportunities. Whatever, the reason, every franchise ought to have an existing exit plan whether the execution of the plan takes place or not.

The Exit Planning Institute reports that: “Roughly six million privately held companies are operating in the United States, with approximately $30 trillion in sales. An owner who is “ready” with an attractive business greatly increases the odds that the business will survive a transition of hands. The question is, how ready are business owners?” Although this report doesn’t indicate whether it includes franchises, we’ll assume these statistics can apply to the franchise industry.

A survey of Long Island business owners was conducted by Dr. Richard Chan of Stony Brook University and Christopher Snider of the Exit Planning Institute. Franchisees should compare the results to their own situation as a franchise owner.

* 74% of businesses are family owned
* 63% have no board of directors or advisory board
* 50% consider ownership transition a top priority but 50% were not ready to transition their business
* 43% had no exit plan
* 17% had a written transition or exit plan
* 60% had not determined what they need to obtain from the sale of their company
* 82% had no outside resource or advisors to assist in an exit plan
* Their most trusted advisor was their CPA

Fundamentals of a Franchise Exit Strategy

Franchisees, whether they operate one or more units should have a written plan in place for either selling their business or transitioning ownership to a family member. For franchisees, this issue is particularly important since unlike independent business owners, the sale of a franchise is subject to franchisor approval, that can require equipment and location upgrades, which in the case of certain franchises can be costly. Many a franchise sales transaction was canceled because neither the seller or buyer would do remodel upgrades. In addition, there are important tax considerations that come into play because of the franchise sale. The lack of an exit plan and the related decisions that need to be made can impact the value of the franchise when it’s time to sell.

How to Begin

Identify a qualified advisor who can aid in developing a formal exit plan. An advisor could be an experienced attorney, financial advisor or accountant, who can assist with the various implications and tax issues regarding the sale or transfer of ownership. Surveys of small business owners indicate that their CPA is considered the most trusted advisor.
Establish the primary exit goal, for example, transitioning to a family member, sale to a third party, the franchisor or private equity group.
Set a range of time for selling or transitioning ownership of the business, such as two-five years or longer.
Decide whether you’ll want to stay involved in the business as an advisor, minority owner, etc. Some buyers want the seller to stay involved for a period of time while others want a clean break. It depends on the buyer.
List those items or actions that could increase the value of the business. Sometimes a few changes can make a major difference in value.
A marginally profitable business can be very difficult to sell, according to BizBuySell, only 20% of all businesses listed for sale actually sell. Finding a buyer on the open market can be a long process. Some businesses can be difficult to value, and the selling price may be much lower than expected.

Payment Terms

Seller financing has always been a mainstay of selling a business. Many buyers are reluctant to pay all cash and use most of their capital. Some buyers also feel that a business should pay for itself and are wary of a seller who wants all cash or who wants the carry-back note secured by additional collateral or personal guarantees. What sellers seem to be saying, at least as perceived by the buyer, is that they don’t have a lot of confidence in the business or in the buyer or perhaps both. However, if we look at statistics, it’s apparent that sellers receive a much higher purchase price if they accept terms.

Studies reveal that, on average, a seller who sells for all cash receives only 70% of the asking price. Sellers who are willing to accept terms receive, on average, 86% of the asking price. That difference on a business listed for $250,000, meaning that the seller who is willing to accept terms will receive about $40,000 more than the seller who is asking all cash, which is compelling reasons for a seller to accept terms.

The Buyers Expect Certain Financial Information

Who does the franchise financials? How believable are the numbers? If the franchise has a bookkeeper, will they let a buyer contact him or her? Can you get a copy of the franchise credit report? Is the franchise on good terms with the major suppliers? Three years of financial information is expected. Equipment contracts or leases or any other financial obligations of the business. They will expect to see receivables and payables and hidden obligations of the business. Be prepared to present some information regarding the performance of the franchise network.

Valuing the Selling Price of the Franchise

The easiest, and probably the most reliable method of putting a recommended selling price on a small business is what is commonly referred to as the discretionary cash flow or the discretionary earnings method. This method is based on the actual earnings of the business and is determined by the profit and loss statement. To figure out the cash flow or actual earnings of the business, it is necessary to make certain adjustments to the profit and loss statement. These adjustments, when added to the profit of the business, determine the “real cash flow” of the business. Add the owner’s salary, perks, family perks, and salary, business trips, company vehicles, and other discretionary expenses. This total cash flow figure is then multiplied by a number applicable to the specific franchise category. For franchises, the average multiple can range from 2 to 4 times SDE. The discretionary earnings method is appropriate for small businesses and franchises many business brokers encourage to use. There are other valuation models available. The Business Brokerage Press sells a Reference Guide for Businesses and Franchises that provides numerous valuation models.

Franchisees should have an exit plan in place to sell their franchise. A formal exit plan will enable the franchise owner to maximize the value of their franchise whether the sale is planned or not.
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About the Author
Ed Teixeira
Ed Teixeira is Chief Operating Officer of Franchise Grade and was the founder and President of FranchiseKnowHow, L.L.C. a franchise consulting firm. Ed has over 35 years’ experience as a Senior Executive for franchisors in the retail, healthcare, manufacturing and software industries and was also a franchisee. Ed has consulted clients to franchise their existing business and those seeking strategic solutions to operational, marketing and franchise relations issues. He has transacted international licensing in Europe, Asia, and South America. Ed is the author of Franchising from the Inside Out and The Franchise Buyers Manual and has spoken at a number of venues including the International Franchise Expo and the Chinese Franchise Association in Shanghai, China. He has conducted seminars, written numerous articles on the subject of franchising and has been interviewed on TV and radio and has testified as an expert witness on franchising. He is a franchise valuation expert by the Business Brokerage Press. Ed can be contacted at ed.teixeira@franchisegrade.com

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