Financial Matters

by Grant Garraway

last updated 14/09/2009

Grant Garraway is principal of Franchise Services Group, a franchise development and sales consultancy based in Melbourne. He has 15 years experience in managing and developing franchise businesses

Getting The Right Price

by Grant Garraway

last updated 14/09/2009

Grant Garraway is principal of Franchise Services Group, a franchise development and sales consultancy based in Melbourne. He has 15 years experience in managing and developing franchise businesses
When the time comes to sell your franchise, how do you get the right price for it? Grant Garraway helps you draw up a plan

As a franchisee, no matter how much you enjoy running your own business you will eventually find that the time has come to move on. When that time comes, it will be very important to get the best possible price for the business you have worked so hard to establish. After all, you bought the franchise not just for the ongoing return but so you could build an asset for yourself and your family.

However, quite a few of those who do sell fail to maximise their return despite trading quite well during the period in which they operated their franchise. This can happen for many reasons: selling too quickly, selling at the wrong time of the year, selling at the wrong time in the economic cycle, not promoting the sale correctly, and so on.

The process of selling successfully is relatively simple, but it requires some patience to implement the necessary steps fully and successfully. So the earlier you have your selling goals in mind, the easier the selling process will be when the time comes.

Why Are You Selling?

The first question you should ask yourself is, 'Am I selling for the right reason?' You should be selling because you believe you cannot add a great deal more to the value of the business and are ready to move on.

You should not sell for the wrong reason – like tiredness. Of course we all get tired of routine and pressure, but sometimes all we need is a good holiday. When was the last time you had a couple of weeks off in the sun and didn't ring back to your business every couple of days on your cell phone? If you're tired, take a good break now (not just a long weekend) and then reconsider your decision to sell. You may well see things differently when you return revitalised and refreshed.

When I was general manager of the Kleins fashion jewellery franchise, a very strong franchisee rang me one day to tell me that she had decided to sell. My initial reaction was one of concern. Interest rates were quite high, the economy was flat and her lease was due for renegotiation with the shopping centre landlord in about a year. It did not seem like a good time to sell to me, as it was very unlikely that she would get the price her years of hard work deserved.

I outlined my concerns to her and asked her to think a little more about it. The next day she rang back to say she had reconsidered, and she would trade on. It turned out to be a great decision as she had record sales the following Christmas. She was still there when I left Kleins, and still trading well.

In addition to tiredness, lots of other minor issues can often annoy you and distract you from the main game. Don't let these little matters, such as your objections to a recent policy change by your franchisor, affect such a fundamental issue as selling your business. So you don't like the new uniform - is it really so important?

Selling The Right Way

However, if you are sure your reasons for selling are well-considered, then make sure you do it properly. The first thing to realise is that there will be plenty of competition. The 2001 Survey of Franchising tells us there are now some 14,000 franchise outlets in New Zealand. If you assume the average franchise owner's life span in their franchise is around six years, then some 2,300 franchise owners must find a buyer each year to sell and move on. This figure is in addition to the 768 new franchises the franchisors of New Zealand sold last year.

Just think about that for a moment. The franchise industry has taken some 20 or so years to attract the existing 14,000 franchise owners, and now we have to find 2,300 new owners each year to satisfy the resale market. So don't expect your sale to be quick or easy. You'll need to present your business well to maximise your price.

Also, carefully consider your asking price. You won't achieve an unrealistic price - the buyers simply have too many other correctly priced businesses to choose from. To sell and maximise your sale price you must plan your sale properly.

How Do I Sell My Franchise?

There are four main ways to sell your franchise:

  • Through the franchisor
  • Part sale
  • Using A broker
  • Selling yourself

The first way is where your franchisor assists in the sale process. You need to check your franchise agreement to see what role your franchisor will or can play, and then talk about your sale with the franchisor. You need to do this anyway, as the franchise agreement may well set out a specific sale process to be followed (including, probably, the need for the franchisor to approve any purchaser), but the sooner you involve the franchisor, the better. They might know of a potential franchisee looking for an existing business.

Some franchisors will virtually sell the business for you, or at least handle much of the sale process. Some re-purchase franchises themselves. Does your franchisor have first right of refusal on any purchase? Will they use their right? Is there an established formula to calculate the sale price?

Part Sale

A second method is to sell only part of your business. In my view, this is a very under-utilised method of selling. During a period working with Midas, the car repair franchise, I met a number of high quality franchise owners who used this method successfully. They acquired an interest in multiple sites by selling part of their first franchise to an existing employee or other contact, then they moved on to acquire other sites, often repeating the process to finish with a majority share in three, four or more stores. It is worth considering if this is suitable to your industry.

Another way of doing this might be to establish a second outlet in your territory, with the agreement of the franchisor, of course. You can then divide the territory and sell off that outlet. This can be a particularly useful approach if your existing business has become so valuable, or if stock levels are so high, that anyone able to afford it is unlikely to want to work as hard as you have in building it up.

Some franchisors (particularly in mobile operations) allow you to sub-franchise parts of your territory in order to make the most of its potential, Check with the franchisor to see if this might be an option for you.

Using A Broker

The third method is to contract with a broker to help you sell. Don't fool yourself – they are not selling the business for you. You must stay in control of the process and see the broker as hired expert help. But the business remains yours to run until sold, and the process of selling must remain your sales process.

Most business brokers in New Zealand will handle franchise resales, but not many truly understand the nature of the franchise relationship. You need to do your homework before you contract with any organisation or even any specific broker. Look in your local papers each week: who is advertising widely, and who is actually successful in selling businesses? How quickly do they return your calls?

Your contract should specify how long the agent has exclusive agency, who pays for adverts and other selling costs, and what is the commission on sale.

Compare the contracts of alternative brokers, and choose someone to sell who has a good track record, and with whom you personally feel comfortable. If you feel comfortable with them, then there is a reasonable chance your potential buyer will too.

Keep in mind that once you have signed a contract with a broker, even if you sell the business to someone who has never spoken to the broker and the broker has had nothing to do with the sale, a commission will almost certainly be payable.

The main motivation for using a broker is to gain access to their existing client base, one of whom may be looking for a business just like yours. You also benefit from potential buyers who enquire after another business the broker has advertised, choose not to proceed with that purchase, and can be introduced to your business.

Selling Yourself

The final way to sell is to handle the sale yourself. This is not for the meek or faint hearted. You will need to respond to every enquiry in response to your ads, including the time-wasters. You will also need to have sound negotiating skills and be able to accept what is and is not realistic. Nobody else can sell your business with the same passion as you have for it, but you have to be careful not to allow your passionate attachment to the business you have worked for to get in the way of doing a deal. However, if you succeed, you will save many thousands of dollars in fees which may be used to clinch a tight deal or improve your return.

If you choose to sell yourself you will certainly need some help from your solicitor and your accountant. It's perfectly OK to negotiate a fixed fee with each of these professionals so you know what your bills will be in advance.

Planning To Sell

Once you have chosen how to sell, you need to spend time preparing to sell. Ideally you will take at least twelve months to do this.

Why? Well, most franchisees charge expenses to their business which are perfectly legitimate for tax purposes, but which are not absolutely compulsory from a business point of view. Taking a year without these costs being charged to your profit & loss will maximise the profit. If your industry achieves business sale prices of, say, around twice the annual profits (plus stock and fixtures & fittings), then every $1000 you can increase the profit by is $2000 increase on the sale price.

Also, many franchisees spend money on costs which again are not absolutely mandatory from a business point of view but are more of a lifestyle decision - for example, having a casual worker in sometimes so the franchise owner can have some additional time off. If you can do a hard year with absolutely minimum operating costs you will reap a much higher selling price at the end of that year.

You must also consider the current economic cycle. Too many franchise owners buy at the top of the economic cycle, later find things get tough, and then want to sell quickly at the worst possible time. They then express concern when their advisers tell them they may not recover their original investment. This is not the fault of the franchisor. If you buy shares on the stock exchange at the height of a boom and then sell during a down time, you know you face the chances of a loss. Business is the same.

So choose both your entry time and exit time well, or at least honestly accept the consequences of poor timing. I've known a number of franchise owners who like to buy in tough times and sell in good times, and they have made very good money from these decisions.

Planning your selling time well in advance also enables you to take advantage of events such as the Franchise Expo in your area which will generate strong interest in franchising at someone else's expense.

During your preparation phase you should also prepare a good document describing your business, its history and its trading results. While the Franchise Association's Franchising Code of Practice does not apply to individual franchisees, this document will be relied on by a buyer in making a purchase decision. Make sure you consult your lawyer and accountant.

Advertising & Promotion

Once all the preparations are finalised, you can then plan a proper communication plan using advertising, promotion, in-store signage, PR, word of mouth and so on to improve the number of people who know your business is for sale. You will need to spend money on advertising, and it may be fairly considerable. The more people who know your business is for sale, the more your chance of finding the right buyer at the right price.

In the context of a newspaper, adverts should be different each time they are used. Remember, most of the people who read your ad this week also read it last week - and didn't respond. Try another angle. Use your logo one week and not the next. State it's a franchise one time and then not another. See what works for you.

Some owners don't even want to put a modest 'For Sale' sign up in their store, even if it is located in a major shopping centre. When you consider that the centre might have tens of thousands of people through it each month, putting up a sign seems obvious. It is a small price to pay to have to put up with the inevitable "tyre-kickers" in return for the chance to tell thousands of potential buyers about your sale.

Non-traditional avenues can be used as well. Promote your business to the immigration agents who handle people wishing to come to New Zealand under the business migration programme. These people have to buy a business to come here - why not yours?

What Is My Business Worth?

The value of businesses fluctuates according to market conditions, so the simple answer is always 'what someone is prepared to pay for it'. There are various formulas, one of which can be found in the article Valuing A Business .

Your accountant, your broker and your own researches into the local market and recent resales within your franchise company will assist you to place a sensible value on your business. It's another reason to sell slowly, as you check out just how much the market is willing to pay. However, what is certain is that with good timing, good planning and solid promotion you will get a much better price than if you ignore these things.

Taking a little time will mean the years of hard work you have already put into your franchised business will give you the rewards you are entitled to receive.

Grant Garraway is principal of Franchise Services Group, a franchise development and sales consultancy based in Melbourne. He has 15 years experience in managing and developing franchise businesses
Order a Print Copy
Order a Print Copy