1,254 views | Aug 22, 2018, 02:25pm

Franchisees Need To Have An Exit

Strategy
Ed Teixeira Former Contributor
Franchises
Relying on 35 years of franchise industry knowledge

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Franchisees seek to sell their business for a variety of reasons including burnout,
personal issues, retirement or new opportunities. Whatever, the reason, every franchise
ought to have an existing exit plan whether the execution of the plan takes place or not

The Exit Planning Institute reports that: “Roughly six million privately held companies
are operating in the United States, with approximately $30 trillion in sales. An owner
who is “ready” with an attractive business greatly increases the odds that the business
will survive a transition of hands. The question is, how ready are business owners?”
Although this report doesn’t indicate whether it includes franchises, we’ll assume these
statistics can apply to the franchise industry.
A survey of Long Island business owners was conducted by Dr. Richard Chan of Stony
Brook University and Christopher Snider of the Exit Planning Institute. Franchisees
should compare the results to their own situation as a franchise owner.

74% of businesses are family owned

63% have no board of directors or advisory board

Today In: Leadership

50% consider ownership transition a top priority but 50% were not ready to
transition their business

43% had no exit plan

17% had a written transition or exit plan

60% had not determined what they need to obtain from the sale of their compan

82% had no outside resource or advisors to assist in an exit plan

Their most trusted advisor was their CPA

Fundamentals of a Franchise Exit Strategy

Franchisees, whether they operate one or more units should have a written plan in plac
for either selling their business or transitioning ownership to a family member. For
franchisees, this issue is particularly important since unlike independent business
owners, the sale of a franchise is subject to franchisor approval, that can
require equipment and location upgrades, which in the case of certain franchises can be
costly. Many a franchise sales transaction was canceled because neither the seller or
buyer would do remodel upgrades. In addition, there are important tax considerations
that come into play because of the franchise sale. The lack of an exit plan and the relate
decisions that need to be made can impact the value of the franchise when it’s time to
sell.

How to Begin
 1. Identify a qualified advisor who can aid in developing a formal exit plan. An
advisor could be an experienced attorney, financial advisor or accountant, who
can assist with the various implications and tax issues regarding the sale or
transfer of ownership. Surveys of small business owners indicate that their CPA
considered the most trusted advisor.
2. Establish the primary exit goal, for example, transitioning to a family member,
sale to a third party, the franchisor or private equity group.
3. Set a range of time for selling or transitioning ownership of the business, such as
two-five years or longer.
4. Decide whether you’ll want to stay involved in the business as an advisor,
minority owner, etc. Some buyers want the seller to stay involved for a period of
time while others want a clean break. It depends on the buyer.
5. List those items or actions that could increase the value of the business.
Sometimes a few changes can make a major difference in value.

A marginally profitable business can be very difficult to sell, according to BizBuySell,

only 20% of all businesses listed for sale actually sell. Finding a buyer on the open
market can be a long process. Some businesses can be difficult to value, and the selling
price may be much lower than expected.

Payment Terms

Seller financing has always been a mainstay of selling a business. Many buyers are
reluctant to pay all cash and use most of their capital. Some buyers also feel that a
business should pay for itself and are wary of a seller who wants all cash or who wants
the carry-back note secured by additional collateral or personal guarantees. What
sellers seem to be saying, at least as perceived by the buyer, is that they don’t have a lot
of confidence in the business or in the buyer or perhaps both. However, if we look at
statistics, it’s apparent that sellers receive a much higher purchase price if they accept
terms.

Studies reveal that, on average, a seller who sells for all cash receives only 70% of the
asking price. Sellers who are willing to accept terms receive, on average, 86% of the
asking price. That difference on a business listed for $250,000, meaning that the seller
who is willing to accept terms will receive about $40,000 more than the seller who is
asking all cash, which is compelling reasons for a seller to accept terms.

The Buyers Expect Certain Financial Information

Who does the franchise financials? How believable are the numbers? If the franchise
has a bookkeeper, will they let a buyer contact him or her? Can you get a copy of the
franchise credit report? Is the franchise on good terms with the major suppliers? Thre
years of financial information is expected. Equipment contracts or leases or any other
financial obligations of the business. They will expect to see receivables and payables
and hidden obligations of the business. Be prepared to present some information
regarding the performance of the franchise network.

Valuing the Selling Price of the Franchise

The easiest, and probably the most reliable method of putting a recommended selling
price on a small business is what is commonly referred to as the discretionary cash flow
or the discretionary earnings method. This method is based on the actual earnings of th
business and is determined by the profit and loss statement. To figure out the cash flow
or actual earnings of the business, it is necessary to make certain adjustments to the
profit and loss statement. These adjustments, when added to the profit of the business
determine the “real cash flow” of the business. Add the owner's salary, perks, family
perks, and salary, business trips, company vehicles and other discretionary expenses.
This total cash flow figure is then multiplied by a number applicable to the specific
franchise category. For franchises, the average multiple can range from 2 to 4 times
SDE. The discretionary earnings method is appropriate for small businesses and
franchises many business brokers encourage to use. There are other valuation models
available. The Business Brokerage Press sells a Reference Guide for Businesses and
Franchises that provides numerous valuation models.

Franchisees should have an exit plan in place to sell their franchise. A formal exit plan
will enable the franchise owner to maximize the value of their franchise whether the sal
is planned or not.
 Ed Teixeira

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Ed Teixeira is Chief Operating Of cer of Franchise Grade and was the founder and President of
FranchiseKnowHow, L.L.C. a franchise consulting rm. Ed has over 35 years' experience as a Senior
Executive for franchisors in the retail, healthcare, manufacturing and software industries and was
also a franchisee. Ed has consulted clients to franchise their existing business and those seeking
strategic solutions to operational, marketing and franchise relations issues. He has transacted
international licensing in Europe, Asia, and South America. Ed is the author of Franchising from the
Inside Out and The Franchise Buyers Manual and has spoken at a number of venues including the
International Franchise Expo and the Chinese Franchise Association in Shanghai, China. He has
conducted seminars, written numerous articles on the subject of franchising and has been
interviewed on TV and radio and has testi ed as an expert witness on franchising. He is a franchise
valuation expert by the Business Brokerage Press. Ed can be contacted at
ed.teixeira@franchisegrade.com Read Less