One of the first things you should be planning when you buy into a franchise is when to leave. It might sound counterintuitive but you will inevitably depart the business at some point, either by selling, handing it over to children or simply passing away. Whatever happens, you want to avoid a situation where you are desperate to sell, where you have done no planning or where the business is no longer attractive to potential buyers. That’s why a strategic approach to exit planning is critical.
The business lifecycle
Your business will have a natural lifecycle. Running a company is a journey and so you need to create a map for the future that considers various options, routes and rewards. Start off by thinking about what you want to be doing in five or ten years’ time and how much you want or need to earn during your life as a business owner. Following this, timely business planning and focused growth targets will help you achieve your goals. So take advantage of the support, experience, knowledge and tools of the franchisor and plan accordingly.
Valuing the business
It can take two to three years to prepare a business for sale and create an attractive proposition. You need at least two – but preferably three – years of accounts showing positive growth. But the value of your franchise itself will always come down to profit. Independent accountants use a multiple of sustainable transferable operating profit (STOP) – that is operating profit, excluding owner drawings, lifestyle benefits, tax, interest and any ‘extraordinary items’.
Generally, accountants will calculate an average STOP over three years and add a multiplier. Different accountants will tell you different things: in my experience, a franchise business in good health will be worth somewhere between 1.75 and 2.25 times STOP. At the most it may stretch to a multiple of 2.5.
Getting a top-end multiple
Buyers are put off if they sense any fear or panic in the seller or if they glimpse any undue risk in the business. You can reduce any perceived fear or risk if you have experienced staff with defined roles and relevant qualifications. Moreover, if you can show that you’re following the franchisor’s business system and taking advantage of tools and processes, it gives the buyer added comfort. Knowing the business has the backing of a franchisor system – one that works and is being exploited – bodes well for their future as the business owner.
The bottom line is, if you want the business to be worth more, you have to make it so. Develop a robust profit line, show consistent growth and create strong brand awareness in your local market. Also, keep equipment, software and processes up-to-date. Having a mix of clients – and not being too reliant on a few – builds further value and creates higher multiples.
But finally, run a happy ship. After all, positivity breeds success.