Using a franchise to build a successful and profitable business has a huge advantage that many people don’t think about…you can sell it for a premium.
And sometimes the premium can be massive!
Here are six important things you can do to maximize the value of your franchise when you’re ready to exit:
#1 – Create a lot of cash flow
This is the first thing any buyer is going to look at.
You’ll see cash flow referred to as Seller’s Discretionary Earnings (SDE) or Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).
If you’re not familiar with these terms, get to know them.
Regardless of what you want to call it, the more money your franchise makes and the longer it’s been making that kind of money, the more value it will have.
For instance, I know franchisees who built cash cows and sold for up to eight figures. I also know franchisees who didn’t have a lot of cash flow which made the franchise hard to sell for any kind of premium.
The cash flow buyers want is the profit your business is producing after you add back all the fluff, personal expenses, and other stuff you’re running through the business that the new owner won’t use to run the business.
With one caveat…
#2 – Make your business transferable
Your business will have a lot more value to a buyer if your business runs profitability without your day-to-day involvement.
This is what creates transferability.
This way, your buyer will be able to feel confident that when they give you a big ol’ pile of cash and kick you out of your business, the business will continue to operate.
This is where having the right team, the right managers, and the right systems in place are crucial.
So, if you want the big ol’ premium for your business, a buyer needs to feel comfortable that your business will continue to perform without you involved any longer.
#3 – Have your documentation ready
Be prepared to support the cash flow you’re claiming with documentation.
Tax returns, profit and loss statements, balance sheets, customer lists, accounts receivables, copies of leases, marketing campaign data on lead flow and conversions, franchise agreements…you probably get the picture by now.
The more you have documented that validates your story and numbers, the easier you’ll make the due diligence for the buyer, and the smoother the process will go.
#4 – Look at your brand’s trajectory
What I mean by brand trajectory is the overall growth of the franchise system and scarcity of territory.
Because if you get in with a growing franchise and get the best territory and/or locations, there will be buyers out there who love the brand and opportunity, and their only option to get into the system is to buy an existing franchise.
#5 – Have a tax strategy
Once you get the big ol’ pile of cash, you want to keep as much of it as possible and give Uncle Sam as little as legally possible.
This is where a good accountant earns his or her keep.
Are you going to do an asset sale or stock sale?
How much value is allocated to tangible assets vs goodwill?
A good accountant will be able to advise you on what you can do to minimize your tax obligation.
#6 – Find the right buyer
And finally, to reap the value, you need to find a buyer to give you the cash.
Think about who you’re ideal buyer could be.
Is it another franchise owner who’s looking to expand?
Is it someone outside of the franchise system who wants to open a new chapter in their life?
Is it a small private equity company that needs to deploy some cash?
A good broker or even the franchise home office in some systems can be great resources to help you find a buyer.
Final thought…these six things I propose to help maximize the value of your franchise are based on personal experience helping a number of people sell and buy existing franchises. This is just my opinion.
At the end of the day, the ultimate value of your business is the number you’re willing to sell it for and the number someone is willing to pay for it.
So, get a lot of people’s opinions about the best way to get a big payday when you’re ready to exit.