Before taking the plunge and putting a franchise business up for sale, there are several things a franchisee should consider and a number of actions that should be taken. These actions will improve the likelihood of achieving a higher price for the business and also make the transition process simpler and smoother for everyone involved. Below I have highlighted some hints and tips we have identified through undertaking our ‘Preparing for Resale’ service.
There are five fundamental questions that need to be addressed prior to a sale. These involve the well trusted route of WHY, WHAT, HOW, WHERE and WHEN!
Why is the business being sold? Prospective purchasers will want to know whether there is a genuine reason for the sale such as retirement, illness, need for a change of direction etc. or whether the business is just not very good. If it is the latter, then the seller will need to be in a position to demonstrate how a new owner can improve performance and make the business an attractive proposition.
What is actually being sold? An inventory of all tangible assets and intangible assets that the business will be able to pass on needs to be prepared.
How much does the seller need/want for the business? The price a seller is likely to receive will be higher if the sale isn’t rushed. Value the ‘actual’ assets and also think about a realistic level for goodwill – see below.
Where to look for a buyer? The franchisor can play a pivotable role here, there may be potential candidates already in the recruitment pipeline. Alternatively, the seller may appoint a sales agent to find a buyer locally. Perhaps even from the sellers existing customer base. It’s wise to have the business visible in multiple places rather than putting ‘all of your eggs into one basket’.
When is the best time to sell? How urgent is the sale? Can the seller plan for the most opportune time to introduce the business to market, bearing in mind factors such as seasonality, the economy, politics and new technology etc?
Preparing the ground work by carefully addressing all of the above is a great way to begin the sales process.
However, the seller need not feel alone as there is also a Who involved in the sales process. The ‘who’ relates those independent or external professionals who are well placed (from a business knowledge and ‘trust’ point of view) to explain at the outset what is Good about the business and what is Less Good or even Bad!
Basically, a fresh or ‘different’ pair of eyes will see things that the seller may not! The business owner can then work on these things to improve the look and efficiency of the business, ready for the due diligence process that the prospective buyers will wish to undertake.
With regards to the actual value of a business, a common way to assess this is to start with the latest (or the average) annual ‘adjusted’ operating profit i.e. excluding interest and depreciation and any of the owners ‘personal costs’ and drawings but allowing for his or her ‘reasonable salary’ and then applying a multiplier of say 1.5 up to say 4 or 5 (and even maybe beyond in extremely good cases).
The size of the multiplier will be based on whether the financial trends for say the last three years are good or bad, how good the areas such as HR, Health and Safety, Marketing and general business image are perceived to be and, of course, the general perception of the underlying sector and the overall economy.
The resulting figure will largely be made up of the goodwill but if there are some valuable fixed assets such as a freehold property then they will of course be valued separately and added to the overall sales price on top of the goodwill calculation.
Finally, some key common mistakes to avoid are given below:
- Having a poor (or no) sales prospectus – We see many occasions where this is the case and it does not make sense! The document needs to be professionally produced and be comprehensive with good photos etc.
- Not having projections showing growth in the prospectus post the sale – This demonstrates what can be achieved by a new owner who perhaps has more energy and enthusiasm to push the business further forward.
- Not having a ‘Data Room’ – This is not an actual ‘room’ but a specific zone into which the seller will place all the things that the buyer will wish to see. The idea is that the seller will have everything ready for the interested party just as soon as they have signed the necessary legal protections to gain access to confidential business specifics.
- Not sharing the ‘Business Sale Objective’ with the sellers accountant – Most accountants look to legitimately reduce tax for their clients – sellers will need to show a realistic but high profitability trend to maximise the sales multiple, therefore the sellers accountant needs to know this.