Franchise Your Business
Organized financial records can make a franchise more attractive to prospective buyers, while giving sellers an opportunity to resolve potential issues before negotiations begin.
Preparing your franchise's financials for resale starts with organizing your records, documenting your business's performance and addressing potential concerns before buyers begin their review.
If you're planning to sell your franchise, getting your financial records in order should be one of your first priorities. Buyers want to know how the business has performed, what it costs to operate and whether its earnings can support their investment. Incomplete or inconsistent records can make those questions harder to answer and complicate the sale.
When preparing financials for resale of a franchise, start by gathering at least three years of financial records. According to Chris Cornella, vice president of business development at US Professional Funding and US Medical Funding, buyers and lenders typically rely on profit and loss statements, business and personal tax returns, balance sheets and other documentation to evaluate a potential acquisition.
"The best way they can do this is by being transparent," Cornella said. "Always provide complete financial statements, including three years of previous profit and loss statements, balance sheets, cash flow statements and business tax returns. Keeping all records organized and consistent shows credibility and reputability."
Buyers will use these documents to get a sense of how the business is doing and whether its financial history raises any concerns about its value. If revenue dropped unexpectedly or the business had a large one-time expense, sellers should be prepared to explain what happened.
One of the biggest mistakes franchise owners make before selling is failing to maintain accurate, organized books. Cornella frequently encounters business owners who mix personal and business expenses, underreport income or overlook working capital needs.
When personal and business expenses are mixed together, buyers have a harder time figuring out how the franchise is actually performing. Sellers should also take care of any outstanding financial problems and be upfront about expenses the next owner could face.
"Another important factor is separating all personal and business finances while being upfront and honest about business challenges, including strengths and weaknesses," Cornella said. "Disclosing upcoming equipment replacements, lease renewals or temporary revenue declines early helps build strong trust with the buyer."
Beyond financial statements, buyers may examine revenue trends, customer retention, marketing expenses and customer acquisition costs. Cornella also identified gross profit margins and seller's discretionary earnings (SDE) as important measures when evaluating a business's earnings and potential return on investment.
Ideally, owners should begin preparing financials for resale of a franchise six to 12 months before putting the business on the market. That gives them time to correct bookkeeping problems, organize supporting documents and address issues that could raise concerns during due diligence.
Cornella recommends making clean financial records the top priority. He also advises owners to review franchise requirements and work with experienced advisers who can help them navigate the sale.
For franchise owners wondering how to prepare financials for resale of a franchise, three steps can help get the process started:
Preparing early gives prospective buyers a clearer picture of what they're purchasing and gives sellers more time to resolve issues before negotiations begin. The better a franchise owner can document the business's financial performance, the easier it becomes for a buyer to evaluate the opportunity.
For more information on preparing your franchise for resale, check out these related articles on 1851 Franchise:
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