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Can I sell my franchise?

Can I sell my franchise?

Categorised in: Ask Nigel    Posted: December 28, 2019

The short answer is YES! But three things resonate with me after 25 years in the business. All franchisees think their business is worth more than it is, it is a common and false belief that a buyer will pay for ‘potential’ and more often than not people sell their businesses at the wrong time and with poor preparation.

Firstly, ask yourself ‘why do I want to sell the business?’ and then ask ‘is it in a fit state for sale?’

If you are thinking of selling because the business isn’t doing very well, you’re fed up and have lost your motivation, chances of finding a buyer at a price you will be happy with are slim!

First rule of selling a franchise – speak with your franchisor first.

A good franchisor will help you see the wood from the trees and will have a process to help you.

More important than even this though is to acknowledge that if you want to get the best possible price for your business, you need to ‘keep on peddling’ even after you have made the decision to exit.

You need to show a robust client base, increasing sales and genuine and improving margins.

Stop peddling and you fall off!

Having decided to sell, let’s start with the concept of ‘potential’. If you have not fully exploited the potential of your business, then why would a buyer pay over the ‘commercial value’ for the business?

If they do, then it is purely for non-commercial reasons.

The market behaves as it should 99 times out of 100.

The best time to sell is when the key performance indicators are at their most positive – sales are up, margins are strong, costs are under control and the order pipeline has visible longevity.

The buyer wants to quantify a reasonable return on their investment with a business that has a good track record and a strong and consistent growth pattern.

Show this and you will genuinely be in a ‘seller’s market’.

However, if your business is not in that position then the buyer will seek a discounted price and you enter a buyer’s market.

If sales and profits are declining, then you create doubt in the mind of the buyer who will rightly seek to negotiate down the value of the business.

With poor performing businesses the buyer is less likely to overlook issues such as property repairs, equipment upgrades and rolled up leases which will prompt them to reduce their valuation.

Moreover, they may look at the deal as a whole – falling profits, declining sales, non-commercial ‘issues’ and conclude that they purchase is not for them.

I consider there are ten areas, in addition to performance, that can influence a buying decision and the price they are prepared to offer for your business:

  1. Property lease and any dilapidations
  2. Condition of the building
  3. The ‘look’ of the business – professional or haphazard
  4. Does any equipment meet minimum standards?
  5. Are there maintenance agreements on the machinery?
  6. Does the business have ‘rolled-up’ leases?
  7. Are key clients ‘secure’?
  8. Is the business ‘top heavy’ – reliant on one or two customers?
  9. Will the seller formally introduce the buyer to the top clients? Critical.
  10. Are any family staying in the business? – some buyers see this as a negative.

However, the financial performance of the business holds the key and most accountants will value a small business by using a multiple of adjusted net profit or sustainable operating profit.

Accountants will generally use an average profit figure based on three years accounts and then apply a multiplier to that figure.

For example, if your adjusted net profit is £50,000 and the accountant’s multiplier is two times, then you could expect a sale price of £100,000 plus stock, equipment and ‘work in progress.’

Like any other business decision, selling your franchise needs to be planned. Decide in advance when you want to sell your business – plan your exit and then work hard to maximise your sales and profit to ensure you get the best price possible.

About the author Nigel Toplis

Nigel Toplis is the Managing Director of The Bardon Group. Nigel sees his key role as providing the vision and direction for each of the businesses, developing new income streams - across the board, recruiting customer focused and passionate Franchise Owners and providing business and management support to my Franchise Owners.

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