Guide To Buying Another Franchise: Think about Your Exit

Although it may seem counterintuitive, it's important to think about your exit strategy when buying another franchise. Whether the exit is driven by unforeseen circumstances or a strategic decision, a well-thought-out exit strategy ensures that franchise owners can maximize their returns and transition smoothly. 

To learn how to best create that plan, 1851 Franchise spoke with Jessica Fialkovich, co-owner of Transworld Business Advisors in Dallas and Colorado, and founder of Exit Factor, a brand that helps companies get ready for sale or exit. 

Start Early: Planning Ahead

One of the most crucial pieces of advice for franchise owners is to start thinking about their exit strategy long before they intend to sell. By planning ahead, owners can avoid the pitfalls of a rushed sale and ensure their business is in the best possible position when the time comes.

“Ninety-five percent of the time when you go to exit your franchise or sell it, it's for an unforeseen reason — illness, moves, burnout,” said Fialkovich. “So the first key point I tell people is to think about the exit way before, because if you wait till you're ready to sell, a lot of the things can't be resolved. It's too late.”

According to Fialkovich, the key points to consider when planning ahead include: 

• Developing a Long-Term Strategy: Think about your exit strategy from the moment you enter the franchise. This proactive approach allows you to make strategic decisions that enhance the value of your business over time.
• Maximizing Earnings: Focus on maximizing net profit to make your franchise more attractive to potential buyers. Stable, high earnings demonstrate the profitability of the business and can significantly impact its valuation.
• Understanding the Resale Process: Each franchise brand has a unique resale process, including approval requirements for new owners, potential transfer fees and the franchisor’s right of first refusal. Familiarize yourself with these aspects early to avoid last-minute complications.

Avoid These Common Mistakes

Many franchise owners make mistakes that can complicate or diminish the value of their sale. One common mistake to avoid is poor financial record-keeping. Valuation often involves averaging earnings over the last three to five years, and fluctuating or unclear financials can negatively impact the perceived profitability of your business.

“One common mistake is that people don't keep really clean financial records, and those financial records aren't consistent year to year,” Fialkovich said. “Valuation is complicated, but basically how it works is it takes a function of your earnings as an owner, and it averages it over the last three to five years and then applies a multiple to it. So if you don't have a clear understanding of what your earnings are, that's going to reduce those earnings.” 

Another common error franchisees make is centering the business around themselves as the owner.

“Franchisees may have a team that works for them, but they're not actually delegating responsibility or accountability to their team,” said Fialkovich. “They're still the sole decision makers in the business. So if they step out of the business, then that new owner has to kind of fulfill all those responsibilities. It's just a harder transition.” 

Instead, franchisees should ensure that the business can operate independently of them. Delegate responsibilities and build a capable team. A business heavily dependent on the owner is less attractive to buyers, who will have to take on multiple roles.

Making Your Franchise Attractive to Buyers

To attract buyers, Fialkovich suggested focusing on profitability, operational efficiency and future growth potential.

Increasing Profit Margins

If you have the opportunity to plan in advance, Fialkovich recommended trying to increase the profit margins of your business. 

“I think sometimes business owners forget the purpose of a business is to make money or make a profit,” she said, “so if you can show a higher profit margin than other businesses, or even other locations in your brand, your business will be more attractive, and it will be worth more.” 

Implementing Strong Processes

By ensuring that robust systems and processes are in place, you can make your business easier to manage and transition. Luckily, franchises make this easier by having a tested business model in place.

Developing a Growth Plan

Prospective buyers are interested in the future potential of your business, so presenting well-documented growth strategies will demonstrate its scalability and profitability.

“Many franchisees and business owners think, ‘Why plan for future growth? That's the next owner's responsibility,’” said Fialkovich. “However, new owners — often unfamiliar with the business — will look to the current owner for guidance on growth. Having well-documented, proven growth strategies in areas like marketing or team expansion can demonstrate the business' potential. No one wants to buy a stagnant business.” 

Legal Steps to Consider

Legal considerations are critical in the sale of a franchise. Addressing these aspects can prevent delays and complications. The legal steps you need to take include:

• Reviewing the Franchise Agreement: Ensure you understand all legal obligations and restrictions in your franchise agreement.
• Maintaining Legal Compliance: Keep your business entity in good standing with state filings and renewals.
• Engaging a Transactional Attorney: Hire an attorney who specializes in mergers and acquisitions to handle the legal documents and processes involved in the sale. They can provide standardized forms and legal expertise to streamline the transaction.

With the right preparation, selling your franchise can be a rewarding conclusion to your journey.

“At Exit Factor, this is what we do,” said Fialkovich. “We help present the exit strategies for businesses. We're a franchisor too, so I’ve seen both sides of this. There's a lot of opportunities for franchisees. They just have to be well educated in advance.” 

To learn more about franchise exit strategies, check out these related 1851 Franchise articles: 

• Franchisee Exit Strategies and Succession Planning
• Exit Strategy Considerations In Franchise Research
• Evaluating Franchise Opportunities: 10 Key Considerations