Growing a Franchise
Preparing 12 to 24 months ahead can help franchise owners strengthen their financials, navigate franchisor requirements and improve their chances of finding a qualified buyer.
Franchise owners who plan to sell should start preparing well before the business goes on the market. Strong financial records, a healthy operation and a clear understanding of the franchise transfer process can make the sale easier and help owners get the most value from the business they have built.
For owners wondering how to prepare to sell a franchise business, Richard Snow, founder and CEO of Amplify Franchise Financing and a multi-unit franchisee of Brooklyn Robot Foundry, recommends starting well before the business goes on the market.
“The best time to prepare for a sale is 12 to 24 months before going to market,” Snow said. “Too many owners decide to sell first and prepare later, which almost always leaves money on the table.”
Preparation starts with making sure the business is financially and operationally ready for a buyer to evaluate it. Snow recommends having at least three years of clean, accrual-based financial statements available. Owners can also use the months before a planned sale to improve margins, eliminate unnecessary expenses and strengthen recurring cash flow. Deferred maintenance and other operational issues should also be addressed before a buyer begins due diligence.
Buyers also want to see that the business can run smoothly after the current owner leaves. Having a management team in place to oversee daily operations can make that transition easier. Financing should also come up early in the process, since a buyer will need the funding to complete the purchase.
“One issue I see repeatedly is sellers finding a buyer before determining whether that buyer can actually secure financing,” Snow said. “A signed purchase agreement means very little if the buyer cannot obtain funding.”
Owners preparing to sell a franchise business have an additional party involved in the transaction: the franchisor.
“Selling a franchise is fundamentally different because you’re not simply selling a business. You are transferring the right to operate under someone else’s brand,” Snow said.
The franchisor will typically review the buyer’s finances and operating experience before approving the sale. The buyer may also need to complete the brand’s training program and either sign a new franchise agreement or take over the seller’s existing agreement.
The franchise model can also offer some advantages during a sale. Established franchise systems may have recognizable trademarks, proven operating systems, historical performance information and existing relationships or familiarity with lenders. Snow said those factors can make financing more accessible and potentially expand the pool of qualified buyers.
The franchisor can have a significant role in whether a franchise resale moves forward. A franchisor will typically review the prospective buyer’s finances and operating experience, approve the incoming franchisee and require the buyer to complete any necessary training. The franchisor may also collect a transfer fee and either issue a new franchise agreement or approve the assignment of the existing agreement.
“The most successful transactions involve collaboration among the seller, buyer, lender, franchisor, attorneys, accountants and financing advisor from the very beginning,” Snow said. “When everyone communicates early, transactions close faster with fewer surprises.”
One of the biggest mistakes franchise owners make is waiting until the business is struggling before considering a sale. Declining sales can make a business less attractive and make it more difficult for a buyer to obtain financing.
Poor financial records can create similar problems. If lenders and buyers cannot clearly understand the company’s performance, underwriting and due diligence can become more difficult.
Owners can also run into trouble by setting a valuation based on what the business means to them rather than on financial performance and market data. Waiting too long to involve advisors, overlooking franchisor requirements and failing to prepare employees or managers for a transition can create additional complications.
Franchise owners who may eventually want to sell should begin thinking about the business through the eyes of a potential buyer.
“Think like an investor long before you become a seller,” Snow said.
That means building predictable cash flow, maintaining clean financial records and developing a management team that does not depend on the owner for every decision. Favorable lease terms, sufficient time remaining on the franchise agreement, well-maintained facilities and equipment and consistent operating systems can also strengthen the business before it reaches the market.
Franchise owners considering a future sale can focus on three areas:
Preparing early gives an owner time to address potential problems before due diligence begins and puts the business in a stronger position when the right buyer comes along.
For more information on selling or exiting a franchise business, check out these related stories on 1851 Franchise:
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