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Guide To Buying Another Franchise: Check Valuations at Exit

The financial evaluation of a franchise goes deeper than the Item 19. Learn how you can estimate and impact the valuation of your franchise at the time of your exit.

Considering how and when you might transition out of the business probably isn’t the first thing you’re thinking about as you evaluate a franchise opportunity, but it should absolutely be part of your decision-making process. While there are other benefits of business ownership, making a concerted effort to evaluate the financial future of the business can help you ensure you choose an opportunity that aligns with your lifestyle, goals and interests.

“If you want to look into getting into the franchising business, I would suggest that you look at it hard,” said George Tinsley Sr., president and CEO of Tinsley Family Concessions. “Choose the best brand out there — and it’s not always the new brand coming on the block. Having a good financial picture going into it is very important. If you don’t have the cash flow, even on a good brand, it can be a disaster.”

Finding the balance between a practical focus on financials and the larger, long-term vision is important to ensure no aspects of the evaluation process are overlooked. While some franchisees are focused solely on what the business can do for them, this isn’t always the best approach.

“That’s not going to work, in my opinion,” Tinsley said. “You’re getting in for the long term. And your goal is to put money to the bottom line, but it’s also to run a sustainable business that you’re going to be able to grow through your reputation with the franchisor and within the communities that you’re doing business in.”

Tinsley continued to explain that, from a corporate perspective, the prime measure of success is often the ability to move a franchise business through the development stages. For franchisees looking to build an asset, “success” requires more than just checking some boxes. In selling a business, owners need to be able to present attractive top-line revenue trends, and it is the response and support of the community that create these.

A valuation, which estimates the holistic value of an owner’s interest in a business, considers assets and cash flows as well as expected returns and future performance projections. So, when thinking about valuations at exit, you need to consider all contributing factors.

Identifying the Right Opportunity

“I typically start by looking at the franchise itself. See how strong the business is, how strong the franchisor is and understand their franchise agreements and how they work,” Tinsley said. “That’s the total package from the standpoint of how strong their infrastructure is.”

He said the next evaluation step is to look into how strong other franchisees in the system are. While you are in control of your own business, other franchisees can impact the brand’s image in your market, therefore impacting your financial projections over time.

If you’re comfortable with all of the resources available, the brand’s reputation and the length of the franchise agreement, you can begin to dig into any publicly available financial reputations and work with a professional to build your own growth plan.

“As far as the financials are concerned, most franchisors will not let you review their financials — they’ll give you a ballpark of what a typical picture looks like,” Tinsley said. “You have to build your own financials. Understanding what you’re getting into and learning from the experience that you have in operations as a franchisee or prospective franchisee, you can put together a pro forma based on what your thoughts are and work with your accounting, financial or CPA team.”

This lays the foundation to begin modeling for the first few years of business and beyond.

Planning for Long-Term Success

During the due diligence period and early stages of ownership, Tinsley recommends being active in the franchise system while maintaining a focus on your personal goals. 

As he explained, many franchisors will not provide specific financial data, and part of that is because a franchise's success depends on so many factors — from a franchisee’s previous experience and local infrastructure changes to franchisor support and market demands, there are so many factors that will impact the final valuation of a business. You may as well take advantage of the ones that will help you to push the business in the right direction.

“If you get involved with the business and go to corporate meetings with the franchisor, you’re evaluating the business from that standpoint,” Tinsley said. “You know what they’re doing during your term of operations and you get a good feel of what that strategy is going to be, but you’re always, in the back of your mind, looking at your personal business development from a franchise or [larger] business perspective.”

While thinking of the longer-term vision and considering all the factors that will build a valuable business over time, Tinsley said prospective owners should also be intentional about creating a specific plan for the first three to five years of operations.

Many businesses fail entirely or hit major turbulence during the first few years because franchisees are focused on pinching pennies, often at the expense of the customer experience. Making a financial plan ahead of time will help give you the confidence and security during those first few years to build a strong foundation that will prepare you to succeed, both financially and in the less tangible ways that drive top-line revenue.

“I ran one of my restaurants for 39 years before I decided to sell, and when I decided to sell, it was quite rewarding [financially]. There were a number of times during that [ownership] period that I thought about selling, but it’s such a rewarding experience,” Tinsley said. “When you have a good business running and you’re able to be a big part of the community that you have those businesses in and with your employee base — watching them come through your system and grow … Those things are so rewarding as an entrepreneur. As long as that is positive, and you’re able to make a great living, then you stay with it.”

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