The prospect of a franchise resale might not be the first thing to come to mind when you decide to join the franchising sector. But whether you intend to sell up quickly or are in it for the long haul, it always pays to think ahead. Keep reading to find out why planning an exit strategy is vital for all franchise professionals.
Believe it or not, most franchisees think about how they’ll leave a franchise as soon as they join it, and most franchisors know how they’ll sell up too. It’s always sensible to enter into business with an understanding of your desired outcome. By planning ahead with a clear objective in mind, you can make sure you reach your goals and avoid a chaotic exit.
That's not to say you need to develop a detailed, long-term strategy or know the exact date of your resale. Instead, it's about visualising how you will ideally leave the franchise when you're ready to do so.
Why plan ahead?
We can’t understate the importance of planning an exit strategy. Here are the biggest reasons why it’s worth thinking ahead:
- Franchise resales can take a long time to finalise, so you should always allow more time than you think you should for the entire process. Plus, planning out your approach will reduce the chance of complications when the time comes to sell up.
- Market conditions can have a significant impact on how much your franchise or franchise unit sells for – or whether it sells at all. Sudden changes can diminish the value of your business, so it’s a good idea to give yourself plenty of time to organise and complete the sale. This will allow you to ride out any fluctuations in its value and give the market time to recover.
- Just as you’ll be ready when positive market conditions come along, you’ll also be prepared to sell your business when it’s smashing its targets. You may be most tempted to sell up when it isn’t doing so well. But it’s worth waiting until you have high sales figures, plenty of brand awareness and a rock-solid social media campaign - this will help you raise your asking price.
- It will give you the chance to review your franchise objectively and fix any flaws you discover along the way. Once you’ve done this, potential buyers won’t be able to use these issues as an opportunity to reduce the asking price. You may even boost the value of the business. Always assume that potential buyers will do their due diligence on your franchise or franchise unit, and they’re likely to find any issues you try to cover up.
- You will be ready to sell the business earlier than you had originally planned if you find a buyer sooner than expected.
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Questions to ask when planning your exit strategy
So, how do you actually go about preparing for your exit? Start by asking yourself a few key questions…
- Do I want to build up a franchise empire and make a career in franchising?
- Will I continue expanding my business until I’m ready to retire?
- Do I want to set up a business and sell it as soon as it generates a substantial profit?
- Do I want to work until I’m financially and emotionally ready to move onto a more profitable franchise or establish my own independent start-up?
Ultimately, you’ll need to ask yourself: What’s my ideal outcome? If everything goes as well as you hope it will, how do you see yourself leaving the franchise? Planning your exit may seem like a negative way to start your journey with a new franchise, but it’s a vital part of it. It’s a practical and astute way of setting objectives and giving yourself the best chance of achieving them.
How prospective franchisees can choose a franchise with future resale in mind
Some entrepreneurs plan to start a franchise unit, build it up and sell it on in a short space of time in order to generate a quick profit. If this is your goal, there are ways to increase your chances of success - before you’ve even signed the franchise agreement.
When the time comes to sell up, you’ll need to be able to show potential buyers your business is a good investment and has been performing well for some time.
In most cases, franchisees prioritise strong financial performance. If you want to get off to a great start, it might be worth investing in a franchise with a relatively low set-up fee. Then, you should be able to reach your break-even point quickly and record high profit margins.
Of course, many other factors can also improve the value of your business. For instance, you should be thinking about how to achieve limited risk exposure, high brand awareness and low staff turnover rates. All these attributes can bump up your franchise’s worth in the eyes of potential investors.
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Planning an exit strategy as a franchisor
For franchisees, selling up and moving on is a fairly common process, but franchise resales are a little more labour intensive for franchisors. So, what happens when a franchisor wants to sell an entire franchise network?
Planning ahead is just as important for franchisors as it is for franchisees. Unfortunately, you may lose out on a lot of potential profit if you rush the process and go for a quick sale, so it’s much better to allow plenty of time to sort the finer details. We recommend you start considering your exit at least two or three years in advance. If prospective buyers assume you’re moving on quickly because of some sort of issue, they’ll probably try to lower your asking price.
Brian Duckett, Chairman of The Franchising Centre, suggests franchisors carry out an in-depth audit of their business. Use a benchmarking process to compare the franchise to other industry players. When talking to franchisors hoping to sell their business, Brian meets with the franchise’s senior team and asks them around 80 questions. Over a couple of days, he develops a clearer picture of the franchise, including its recruitment, training and monitoring practices. He finds out:
- How well the system has been documented
- How well it’s protected its intellectual property
- How efficient the marketing system is
- How efficiently the franchisees operate
- How qualified the management team is
- How the franchisor and franchisees can boost their revenues
In short, the franchise’s management team should be researching all the questions a potential buyer might ask.
Once they’ve finished reviewing the business, it’s time to create an “action plan”. Brian recommends franchisors think about “what needs to be done, when it should be done by, who is going to do it and what it will cost”. Then, organise regular meetings with the relevant team members to make sure everything progresses smoothly.
In the lead-up to the franchise sale, the franchisor should be able to use their action plan to iron out any issues. This preparation process should help make sure potential buyers don’t find any reason to reduce the sale price.
More information on franchise resales
Selling your business is a big step, whether you’re a franchisee or a franchisor. You’ll find more information and advice on making sure the process runs smoothly here at Point Franchise. Use the search box to see our franchise resale articles, or just browse our most recent publications.
Alice Tuffery, Point Franchise ©