Yes, before you start a business, you should think about exiting
And by exiting, I mean thinking about the question “What is my long-term objective with my own profitable and successful business?”
Are you going to cash out on your hard work by selling the business or pass the business on to a family member and create a legacy?
The exit equals the end game
For some, the end game is retirement. For others, it’s signing up for round two and starting, building and selling another business. Regardless, the exit creates a significant long-term financial and personal opportunity to strive towards.
Starting one’s research with a rough idea of the long-term game plan for a small business adds an important variable to evaluate businesses and franchises against.
Exit strategies in franchising
One of the biggest advantages of researching franchises is the level of transparency that franchisors provide to prospective franchisees. The franchisor’s track record of franchise unit growth, the financial performance of franchisees, franchisor financial health and real-world feedback from franchisees (including insight about exit strategies) are just some of the different types of information available.
Some of the information available is disclosed in the franchise’s Franchise Disclosure Document. In short, the Franchise Disclosure Document is a part of consumer protection guidelines that mandate all franchisors must provide prospective franchisees with information in a standardized format through a Franchise Disclosure Document (“FDD” for short). This is overseen by the Federal Trade Commission in most states (some states have their own regulations but all of them follow the essence of the FTC’s disclosure requirements).
The Franchise Disclosure Document is just one of many sources of information to review when researching and evaluating a franchise.
How to effectively evaluate a franchise business
In my experience of helping thousands of people research franchises, the most productive way to approach researching a franchise is through a structured four-step process. This process will give you the opportunity to learn everything you need to know in order to figure out if the business is the right for you, including specific information about whether or not a particular franchise aligns with your exit strategy.
- Step 1: Conceptual overview
- Step 2: Franchise Disclosure Document Review
- Step 3: Validation
- Step 4: Face-to-face meeting
This is provided by a Franchise Development Representative over a series of calls and webinars. Their goal is to help you with a detailed understanding of their business model and the role the owner plays in that model. They also discuss the resources, support, and systems available to their franchise owners. They will also want to learn a lot about you, your motivation for starting a business, your goals, your strengths, your family’s support, your funding plan and other information unique to you. They are assessing fit just as you are.
The Franchise Disclosure Document is sent to all prospective franchisees and contains a lot of raw information in addition to the information mentioned above. The Franchise Disclosure Document is typically delivered sometime during the Conceptual Overview step.
This is the most important (and fun) step (in my opinion).
It involves speaking with current franchisees to gain real-world insight. By speaking with franchisees, you can gain the real-world perspective about how the conceptual information and raw information in the FDD translates into an operational reality. These are typically fun conversations and also contain a ton of advice and best practices to make note of and follow if you decide to move forward and start the particular franchise.
This can be called “Discovery Day” or “Meet the Team Day” and is the last step in the process. It typically involves traveling to the franchisor’s headquarters to meet with the management team and other key staff who work with franchisees.
Speak to Franchise Owners!
As it relates to evaluating a franchise against your exit strategy, one of the most valuable sources of information to learn about a franchise business is the franchisees themselves. As part of the Franchise Disclosure Document, franchisors provide a list of all active franchise owners in one of the many Exhibits. In another Exhibit, Franchisors also provide a list of all owners who have exited the system. The latter Exhibit is where you’ll find the list of franchise owner who sold their businesses during the 12-month period outlined in the Franchise Disclosure Document. From here, you can call current and former franchisees to discuss their exits or exit strategies.
Good franchisors want their franchisees to maximize the opportunity around their exits. If selling the business is the goal, the best franchisors help franchisees sell their business by connecting the selling franchisee with prospective franchisees. The franchisors also provide insight around what other franchisees sold their business for and offer a lot of advice to help franchisees maximize the value and sale price of their business. If passing the business to a family member is the goal, then good franchisors will help formulate and implement a succession plan to assist with the transition. Being a part of a franchise system opens the door to a number of resources available to help franchisees maximize the opportunity around their exit that are unique to being a part of a franchise system.
A successful business = a valuable asset
Looking at a business through a financial perspective, a successful and profitable small business and franchise becomes an asset in one’s overall financial portfolio. And this particular asset has some features that are unique compared to other assets and financial investments.
For instance, a small business has significant short- and long-term financial benefits.
Short-term, a business is a source of cash flow that produces income to use for personal and household expenses. The business also provides discretionary cash flow to reinvest in growing the business. For many entrepreneurs, the control and freedom they have in building a business that is tailored to their financial goals are key drivers that keeps them on the entrepreneurial path vs. the traditional W-2/corporate route.
Long-term, a business is an asset that can be sold. The more successful the business, the more valuable it becomes, and thus the more money someone will pay for it. For many who leave the corporate world to start their own business, the equity and value built in their own business are analogous to stock options or a 401(k) plan or other investment benefits employers tend to offer employees. The biggest difference being that entrepreneurs have direct control over driving value for their investment (i.e. their business) versus gambling on a third-party company, management team, marketplace, and other external factors to increase the value of the stock.
An example of a successful franchise exit strategy
Very recently, I was fortunate to play a role in helping a lovely couple sell their franchise business and capitalize on their exit strategy. This particular couple built an education franchise over an eight-year period and sold it for a double-digit multiple of what they initially invested in the business. After the sale closed, the couple pursued their next chapters in life – one enjoying retirement and time with their children and the other investing in another franchise to build and sell one day.
Their journey started because they weren’t happy with their career paths in the corporate world.
Like many people, they started working for a company at a young age and worked their way through the corporate ladder. While they enjoyed success, they became increasingly dissatisfied with the lack of fulfillment they felt in their jobs. They wanted more flexibility during the day to attend events with their children. Frequent business trips took them away from their families which added to their frustration.
So they decided to research starting a business and they quickly realized that investing in a franchise offered them the highest opportunity for success.
They had the desire and motivation to build their own business and were prepared to invest the hard work and sweat equity, but they didn’t have the business idea. With the help of a franchise consultant, they were able to narrow down and carefully research some franchises that aligned with their goals and strengths. For a variety of personal reasons, they decided on an education franchise which was rapidly emerging at the time.
Fast forward a number of years and skip over a lot of hard work and persistence, and this husband and wife team built a business that was producing more household income than they had ever dreamt of and required less than five hours of their time per week to manage.
The business was staffed with employees who performed every aspect of the day-to-day operation. The franchisor’s marketing and lead generation processes drove a continual supply of leads for the business to convert into paying customers. This franchise (like many) also developed and provided its franchisees with a proprietary operating system that centralized and automated a lot of the administrative aspects of the business thus enabling the franchisees to operate very efficiently with less overhead and, ultimately, more cash flow.
Operationally, this couple built and structured their franchise in a way that made the business very transferrable to a new owner. Since the business operated without their direct full-time involvement, a new owner could step into the ownership role rather seamlessly which made the business more attractive to a broader demographic of buyers (more demand = more value).
This couple will tell you that by investing in a franchise they were able to leverage the training and systems provided by the franchisor to accelerate their path to profitability and maximize their margins by using the franchise company’s infrastructure and proven strategies which ultimately helped them enjoy a very healthy cash out on their exit. If it weren’t for the business model, support, systems, and training provided by the franchisor, they probably wouldn’t have been able to achieve what they did.
Franchises tend to be a fit a for those who want to start their own business to achieve certain goals that aren’t attainable by following their current career path yet don’t want to have to reinvent the wheel and take the risk of proving a business concept is viable. Investing in a franchise can offer reduced risk along with proven systems needed to run every aspect of the business. Ultimately, this creates the opportunity for someone to build a business that achieves their financial and lifestyle goals typically faster than if they built an independent business. A byproduct of this success is the creation of an asset that can have tremendous value.
It’s important to understand that investing in a franchise is not a magic bullet that provides a “sure thing” or “guaranteed success.” While the story above is one example of countless success stories that exist in franchising, behind the scenes of each success story you’ll find A LOT of hard work, grit and sweat equity invested by the owners to implement the franchise business model locally and build the business to a point where it meets or exceeds their goals.
While it’s important to start thinking about exiting before you even start a business or a franchise, the most important step in setting yourself up for the success you want to achieve is researching businesses and franchises that proper way so you can find the ones that are the best fit for you. It sounds trivial and is common sense advice, but you would be surprised by what I’ve seen over a decade in franchising.
Researching franchise businesses is a commitment and requires an open mind.
Think about this…almost all of the happiest and most successful franchisees I’ve worked with over the years, decided to open a franchise that…
- They had never heard of…
- Was a business they had never thought of…
- And, finally, would have never even researched the business if they just focused on the widget or service the business provided (and basically just judged it by the surface).
By focusing on the business model, the role of the owner and franchise system, these very successful franchise owners were able to evaluate the business objectively and focus on how it fits their goals and strengths. Following the right research process with the right mindset will lead you in the right direction to find your best fit (which could very well be not starting a business at all).
The best franchises provide the business idea that has been proven to be successful in the marketplace. The best franchises also provide training, lead generation strategies, infrastructure, technology, software, staffing plans, ongoing support, peer networking opportunities, exit strategy support and a continual evolution of the business model to capitalize on new opportunities. Most importantly, the best franchise systems are made up of a network of profitable and happy franchisees each with a unique exit strategy they plan to capitalize on when they are ready to step away.
Dru Carpenito is a franchise industry expert who specializes in helping aspiring entrepreneurs and individuals invest in a franchise opportunity that is the ideal fit for their goals and aspirations. Dru has extensive experience within the franchise industry including executive level positions with two very successful franchise brands where he played an integral part of opening and supporting hundreds of new franchises around the world. He has a true insider’s perspective of franchising that enables him to provide his candidates with thorough insights and advice as they consider and research franchise ownership.
If you’d like to discuss franchising, Dru is happy to have a conversation. You can email him at email@example.com or call him at 800-607-6595.