Franchising Exit Value
The final part of the franchise value proposition is the ability to successfully and profitably sell your business. With over 20 years experience as an entrepreneur, I have personally bought and sold both franchised and non-franchised businesses. I have also worked with a large number of people who have done the same. It is a fact that franchised businesses sell more reliably and at a higher value than non-franchised businesses. Why is this? The reasons generally fall into the following categories.
One of the biggest questions that a buyer has is – ‘will I be able to successfully take over this business’. In the case of an independent business, often the existing business owner agrees to stick around for a while and ‘trains’ the new owner. As helpful as this is, the independent business owner doesn’t have a training manual, operational manual or marketing manual. In addition, the independent owner does not have experience training individuals to run the business. As a buyer, this can be unsettling. When a buyer is looking to purchase a franchised business, they know that a formalized training program is in place. Even if the former owner disappears tomorrow, they are safe when it comes to training and support. The more confident the purchaser is, the more likely they will buy the business.
In the case of the sale of an independent business, the only parties that really care are the buyer, seller and maybe a business broker. In the case of franchise resale, the franchisor also has a vested interest in a success transfer of ownership. The franchisor wants to see a successful transfer to new ownership (as opposed to a closure) several reasons.
- The franchisor receives income from the ongoing operation. This is the lifeblood of a franchise operation. If locations close, the franchisor’s income is reduced.
- If the location closes, then the franchisor receives a black eye in the local community. People see the closure and are less likely to patronize the franchise system.
- A closure must be reported in the Franchise Disclosure Document (FDD). No franchisor wants an FDD will a long list of closures. As a result, some franchise systems work hard to assist in the transfer of ownership from one franchisee to another when the time is right. This assistance improves the likelihood that a successful resale will occur.
When a person decides to investigate purchasing an existing business, the first thing they run into is the price and whether or not the price is ‘fair’. Without getting into an entire accounting course on company valuation methodology and the creation of normalized P&L’s, determining the true value of an independent business is quite a challenge. Valuation is generally determined as a multiple of earnings, or in a break even business, based on replacement cost. Unfortunately, it is very hard to nail down these numbers with any level of confidence. Realistically, it is even hard to audit a small, independent business. As a result, most buyers are not able to verify the price and, as a result, offer less to purchase the business.
In the case of a franchised business, there is a very clear path by which you can verify replacement cost, cash flow and expected earnings. It is through discussions with both the franchisor and other franchisees. The more confident the buyer is in the numbers, the more you will get when it is time to sell the business.
When an independent business owner decided to sell their business, they will often hire a business broker. The business broker will then advertise the business in a generic way. If a person shows interest, the business broker will ask the interested party to sign a non-disclosure agreement and then they will engage in a more in-depth discussion. Although this approach works, in franchising you also have the franchisor and your fellow franchisees. Based on my experience, it appears that approximately 50% of the time, the buyer of a franchised location will be either a fellow franchisee who wants to expand their holdings, the franchisor who wants to turn the location into a company owned location or a prospective franchisee that the franchisor is aware of and is already interested in joining the franchise system.
To summarize, franchises simply have a larger pool of potential buyers and therefore a franchisee is significantly more likely to find a buyer.