Growing a Franchise
Cash flow, financial performance and the ability to operate without the owner all play a role in determining what buyers may be willing to pay for a franchise business.
Franchise owners considering a sale naturally want to know what their business could bring on the market. That number can vary widely, even among locations within the same franchise system, based largely on the performance of the individual business.
Bill Luce, senior business advisor at Transworld Business Advisors of Florida, said owners sometimes focus on the brand or the years they have invested in building the business. Buyers tend to look closely at what the business can produce financially after the sale.
“This is probably the question I get asked the most, and the answer is always, ‘It depends,’” Luce said. “The biggest driver of value is how much money the business actually puts in an owner’s pocket. Buyers are purchasing future cash flow, not just a franchise name or a nice-looking location.”
Cash flow is one of the most important factors in determining the value of a franchise. Buyers want to understand how much money the business generates and whether that performance is likely to continue.
Financial consistency matters, too. Buyers will look at whether revenue has remained steady or grown over time, along with profit margins and the quality of the company’s financial records.
The operation itself can also affect value. Luce said buyers consider how much time the current owner spends running the business, the remaining term on the lease and the strength of the franchise brand.
“A business with solid systems and good financials is always going to be worth more than one that’s dependent on the owner being there every day,” he said.
When buyers evaluate a franchise, they want to know what they can expect to earn if they take over the business.
“That’s why cash flow is king,” Luce said. “They want to see consistent revenue, healthy profit margins and clean financial records that support the numbers.”
Buyers also look beyond the financial statements. A stable staff and an experienced management team can make the business easier for a new owner to take over. Documented operating procedures can provide additional confidence that the business will continue to run consistently after ownership changes.
Online reviews can also factor into how buyers view the operation. A franchise with a good reputation, established processes and a team already in place can offer a smoother transition.
“The easier the business is to transition to a new owner, the more valuable it becomes,” Luce said.
Owners have often spent years building their businesses, which can make it difficult to separate personal investment from market value.
“The biggest mistake is letting emotion determine value,” Luce said. “I completely understand it. Owners have poured years of their lives into building their business. But buyers don’t pay for sweat equity; they pay for future earnings.”
Another mistake is waiting until a sale is approaching to organize the business. Incomplete financial records, undocumented processes or an operation that depends heavily on the owner can become problems once buyers begin reviewing the company. Understanding what a franchise is worth before the owner is ready to sell can provide time to address those issues.
Owners who expect to sell within the next few years can use that time to strengthen the business before it reaches the market.
“If you’re thinking about selling in the next couple of years, focus on making the business more attractive to someone else,” Luce said. “Increase profitability where you can, tighten up your financial records, document your processes and make sure the business can run without you being involved in every decision.”
Improving profitability can directly affect the financial picture buyers see. Clear records also make it easier for buyers and their advisors to verify the company’s performance during due diligence.
Reducing the owner’s day-to-day role can help as well. A buyer taking over a business with established employees, management and operating procedures has less to rebuild after the transaction.
“Buyers are willing to pay more for a business that’s predictable, well-organized and easy to take over,” Luce said.
Franchise owners asking “What is my franchise worth?” do not have to wait until they are ready to put the business on the market to find out.
Luce recommends speaking with a business broker one to two years before a potential sale. An early valuation can give owners a clearer idea of where the business stands and what they could improve while they still have time to make changes.
“A good broker can help you understand what your business is worth today, identify areas that could increase its value, and help you avoid surprises once buyers begin their due diligence,” Luce said. “I’ve seen owners make a few smart improvements over a year or two that added far more to the value of their business than they ever expected.”
Franchise owners considering a sale can focus on three areas:
A franchise owner may not be able to control every factor that affects valuation, but planning ahead provides time to improve the areas that are within their control. As Luce put it, “A little planning today can make a big difference when it’s time to sell.”
For more information on franchise valuation and preparing a business for sale, check out these related stories on 1851 Franchise:
Sign up for the 1851 Franchise newsletter to get our biggest stories before everyone else
By signing up, you agree to our user agreement (including class action waiver and arbitration provisions), and acknowledge our privacy policy.
