Being in franchising for over 23 years has taught me a lot about the buying and selling of small businesses. Namely that all sellers think their stuff is worth more than it is and that a buyer will pay for potential. They won’t
The first thing to say is that 99% of the time the market behaves as it should. And much to the chagrin of sellers the buyer will not pay for potential and, on the 1% of time they do, it is for non-commercial reasons – loyalty to area, business affinity or more money than sense. Furthermore, people often sell their franchises at the wrong time.
The market states that the best time to sell is when the key performance indicators (KPIs) of a business are at their most positive. That means a seller’s market is when sales are up, margins are strong, costs are under control and the order pipeline has some longevity. However, if you and your franchise are not in that position of confidence, if the KPIs aren’t good,then the buyer will naturally be seeking a discounted price and you enter a buyer’s market.
So if you’re looking to sell don’t let the company just fizz out. Remarkably, some sellers simply can’t understand why someone won’t pay the asking price based on historical performance or potential rather than recent performance. Crazy hey?
Of course it doesn’t work like that. Trading performance is the key to determining the likely value of the franchise but there are also several other factors a buyer might look at that might affect the price offered. If there is a property then the lease, any dilapidations and general condition of the building are important considerations, while any equipment with maintenance agreements in-situ will be worth more to the buyer.
The buyer will be wary if the business is to-heavy. So if it’s reliant on a small number of customers they’ll want assurances that clients are secure and that the seller will personally introduce the buyer to the key customers.
So, taking all of this into account, just how do you value a franchise? Well, put simply most accountants will value it by using a multiple of adjusted net profit or sustainable operating profit and generally use an average profit figure based on three years' worth of accounts and then apply a multiplier to that figure.
Multiples vary but in my experience I would calculate the value based on a multiplier of between 1.75 and 2.25 times the adjusted net profit. So, if your adjusted net profit is £50,000 then you could expect a sale price of between £87,500 and £112,500 – plus stock at valuation. If your profit is £10,000pa do not expect to get more that £22,500, irrespective of the perceived potential.
Decide well in advance when you want to sell your business, plan your exit, work hard to maximise your sales and profit and work with your franchisor.