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Exit plan: the secrets of successfully selling a franchise network

on Tuesday, 02 June 2015. Posted in Finance

There are many boxes that need to be ticked if a franchisor is to make a successful exit, says Brian Duckett, chairman of the Franchising Centre

Exit plan: the secrets of successfully selling a franchise network

It all started when a franchisor, who I knew well, phoned me one day saying, “Brian, I’ve had enough and I want to sell the business. That’s company-owned outlets, franchisees, everything. Can you help me find a buyer?”

“Well yes of course,” I said. “We’re always in contact with experienced and qualified people who want to buy master franchises from overseas to start from scratch or to acquire existing networks in the UK that they can build to greater success. Have you had the business valued and what’s your timescale?”

“I haven’t really thought about how much I want for it, though it must be worth a couple of million at least. As for timing, I’d like to be out by the end of next month”.

That’s when my heart sank. As I explained to my friend, you won’t get anything like what the business is worth if you haven’t planned the sales process well in advance, ideally at least two to three years before you want to complete the transaction. Anything that looks like a fire-sale or desperation to be gone may not attract any interest at all. If it does, it will be from someone who will drive a very hard bargain and there will be no value at all for the seller.

Of course, with nearly forty years in franchising behind me, that wasn’t the first time I’d had a similar request but we seem to get more and more these days. So I looked into how a relatively simple yet effective process could be developed to help franchisors grow the value of their business, while preparing it for sale sometime in the near or distant future. After all you wouldn’t sell a car without having it valeted, a house without tidying it up or indeed a horse without getting it fit and shining its hooves.

My first port of call was a firm of consultants-to-consultants, which I knew had developed a similar process for businesses such as my own. They understood how consulting businesses work and how they can be improved, they knew what buyers of such businesses were looking for; and they knew how to put the two together at the right time. We subjected ourselves to their process, which in itself was a valuable exercise and then discussed how we could adapt it for the franchising community. After all, we know how franchised businesses work and how they can be improved, we know what buyers of such businesses are looking for, and we know how to put the two together at the right time.

To cut a long story short, it’s a benchmarking process called Value Builder, which measures a number of key performance indicators that are specific to the successful operation of a franchised network. The point of the exercise is to establish where the business currently stands in comparison to how it will need to score if it is to achieve the gross and net profit figures that will produce the desired selling price.

Over an initial meeting, which can take a couple of days, we take the franchisor’s senior team through something like 80 questions related to how they recruit, train, monitor and motivate their franchisees. Areas covered include how well their system has been documented; how well they’ve protected their intellectual property; the efficiency of their franchise marketing and recruitment; how effectively their franchisees operate; how both the franchisor and franchisees can increase their revenues and profits; and how well qualified and effective the management team is. Of course, the latter point is of particular interest to a buyer, particularly the sort of corporate entity that will have the funds you’ll be looking for.

The franchisor and his colleagues are encouraged to score themselves for each of the questions, with our facilitator questioning and cajoling them to change their minds based on what we know about theirs and many similar businesses. Scores are subsequently transposed into a speedometer-style, traffic-light related graphic whereby green means we’re okay but could improve in time; amber means we’re not too good and will need to address these items; and red means we’d better do something pretty soon or we’ll be in serious trouble. The final output of this first stage of work is a prioritised action plan which details what needs to be done, when it should be done by, who is going to do it and what it will cost.

No doubt we’ve all been through something similar in the past where someone has drawn up a plan but very little happened after that. In my experience the value of such a process is greatly enhanced when the franchisor engages us to drive progress towards implementing the action plan, with regular review meetings and intermittent telephone and e-mail contact with the various members of the team. People will often do more when a third-party is involved; indeed the chairman of a multi-million pound business once said to me at one of their review meetings, “I’ll admit to you Brian that if you hadn’t been coming today I doubt if any of my actions would have been completed.”

So how does all this help with a franchisor’s exit plan? 

Firstly it focuses the mind on the desired outcome, for example “to achieve a sale price of £3 million by the end of 2017”. 

Secondly, it anticipates all the questions that a buyer will ask or the items they will want to consider in order to get the price down. In effect, the seller is doing in advance the due diligence that the buyer will eventually do, enabling the former to put right all the things that the latter will attempt to pick holes in, thus making it harder to reduce the amount offered. 

Thirdly, it continually improves the performance of the franchisor’s business and steadily increases their revenues and profits, so there are benefits that can be taken along the way even if the opportunity to sell doesn’t arise. The good news is that if someone comes looking to acquire the business you’ll be ready, even if you haven’t yet actively marketed it.

It’s no secret that there are several organisations currently interested in acquiring franchised networks to build a stable of such businesses. They have the skills to build franchised networks and can provide a centralised service to provide the necessary recruitment and support functions, regardless of the end product or service which the franchisees will deliver. We are in regular contact with them, we know what they’re looking for and they will listen when we say we have something which may interest them. They may have to pay a little more for a business which we have prepared for sale but they are more likely to buy it than one which may have a number of skeletons in the cupboard.

Naturally the whole process has to be carried out with the utmost trust between the parties and confidentiality from anyone who doesn’t “need to know”. We don’t want any staff members or franchisees accidentally or purposely putting a spanner in the works, which is why I tend to be personally involved in these projects and should always be the first point of contact.

As one American franchisor once said to me, “When do you tell the franchisees and staff that the business is for sale? Not until the day after it’s been sold!” 

Brian Duckett is chairman of The Franchising Centre.

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