Richard Pakey of Lime Licensing explains why becoming a franchisor could boost your business financially.
One day you will exit your business and, when you do, let’s hope it’s a planned departure and not one brought about by necessity. But assuming that one day you decide to sell and move on, let’s discuss the subject of exiting. My belief is that, as a franchisor, you are more likely to exit with a higher value, than as an independent business owner with various outlets around the country.
For years, a standard way to value most traditional business models was a multiple of net profit – perhaps a multiple of between 1 and 2.5. However, in reality, it is now usually between 1 and 1.5 at best. But I firmly believe you will stand a better chance of maximising value through franchising.
The moment you turn your business into a franchise, you can now sell a ‘territory’ to your first franchisee. This will strategically boost your original site, which may have become your headquarters or head office, and you will also receive an incoming fee for the privilege.
Do this multiple times, and this will prove you have the capability to expand your network over multiple sites across the UK – and perhaps even abroad. And, providing you have chosen your franchisees wisely, these additions will all add value to the business.
Territories are sold with fixed ongoing fees, and/or percentage royalties, during the life of the franchise agreement. And when this term ends, contracts are often extended, or sold to replacement franchisees. Once established, calculations can be done to equate this to real-life figures. This means you discover what each franchisee is worth to you – as a lifetime value proposition.
This is further good news because this information gives you a valuation, and any business which enjoys residual income will always grab the attention of potential investors. I always think it is better to act like a franchisor rather than a business owner.
Don’t forget, you can now put a value on areas or territories that are yet to be sold. You may have calculated that your company’s network could be split into 100 territories, of which 60 have already been snatched up. This means there are 40 unsold areas available for any budding investor to sell. In turn, this provides additional fixed fees and royalties, all adding value to your franchised business.
With all this knowledge safely stored in your brain, you have probably realised that your business does not have to be sold off as a single unit. Whether you run a franchise or a single business with many sites controlled by a central administrative hub – such as most major supermarkets – each unit has a separate value.
And if you are a mid-size company with a number of outposts dotted around your region, how can you benefit from becoming a franchise? The same question can be asked of owners with just one current site, but who are keen to explore the options of turning the business into a franchise. Yet it has to be said that any business should only be franchised if the owner truly wants to do so.
They must firmly believe that their model can be successfully replicated across a network, with a central hub or head office capable of adequately supporting its franchisees. HQ must be properly funded, with enough staff members who have suitable expertise in all areas of the business.
Failure to achieve this will mean only short-term gain, while franchising is most certainly a long-term game. The rewards will increase the more established you become.
So how do you go about franchising your business?
First of all, speak to an expert in this field. They will discuss the merits of whether your business should, or could, be franchised. By securing the services of a franchising expert, they will help you with business modelling, ensure all documentation is correct, inform you of any strengths and weaknesses in your particular sector, and discuss contract agreements and legal requirements.
If still unsure about whether you should make the switch into franchising, you can always carry out additional research by visiting online franchise portals. And you should probably do this anyway. This will enable you to check up on other businesses that are similar to yours. Check out what their franchise fees are, and how many territories they have – and if any exist in your region.
In the UK there are only around 1,000 franchised systems currently operating, so the potential to make inroads into your market are far better than in most other countries. Finally, franchising could strengthen your business risk and provide greater security, which can only help when the time comes to exit.
