Preparing your Franchise For Sale

By Scott Juetten

If you are interested in preparing your franchise for a sale, you may have your work cut out for you. Selling an existing franchise is just as difficult as selling an existing business, but with the added difficulties imposed by a franchise system. The most important thing to remember is that a buyer's greatest fear is that you are the heart and soul of your business. You will not find any buyers if it appears that when you walk out the door, so will the business.

In many cases this is also true for franchisees, because they have built the business around themselves; they have all the knowledge and skills to run the business, and they have great difficulty in delegating the various functions.

If this is you, then what you have is not a business, but a very demanding job from which you can’t resign. No wonder you want to sell it! And if it appears like this to the buyer, why would he want to pay perfectly good money to rescue you from your plight?

The answer is to:

1. Systematize your business

When you have all the various functions within your business systematized and thoroughly documented, delegation is no longer such a problem. Each person should have a clearly defined role, a chain of command, and a designated set of tasks and procedures which, when carried out competently, leads to measurable and desired outcomes. Make sure the Franchise model you purchased is in tac. Too many franchisees change the model so much that a prospective buyer would not recognize it. You purchased a franchise for a reason: Predictability. Keep it that way. A buyer can then see himself fitting comfortably into this business.

2. Document your business

You need to have a BUSINESS PLAN, so that you, and everybody in your team, knows exactly where you are headed and how you propose to get there.

As well as documenting your procedures, it also helps to document your relationships with other parties in your marketplace:

  • With Suppliers. Your verbal, or "Handshake Agreements" look very flimsy to a potential buyer of your business. Converting these into written agreements wherever possible will make your business confidence-inspiring, and at the same time, the very process of putting them into writing will enable you to cement these relationships even further, and perhaps even improve your lines of supply.
  • With Customers. If you can negotiate written agreements with your customers, you can make your business look that much stronger, and of course, the process of securing your outlets can often give you power to go back and re-negotiate your supply agreements.
  • With Other Parties. Document your relationships with Industry Regulators, Trade Organizations, Quality Assurance, Therapeutic Goods Administration, Environmental Protection Agencies, Health Department, and a whole host of other parties who have some power or influence over your business. Document these relationships so that a buyer can not only see where your business stands within its industry but also feel confident that its existence is not under any undue threat.

3. Document your profit performance

We are all more or less Tax driven, but the trap we set for ourselves is that it then becomes difficult to prove the true profitability of your business to a buyer.

The solution is to adopt transparent, legal, Tax Avoidance strategies that will enable you to minimize your Tax burden, whilst retaining the ability to clearly demonstrate your true profitability to a buyer through "Add-Backs".

  • Produce monthly profit reports. Within an open framework, you can produce monthly reports to demonstrate to your buyer your ability to monitor and manage the performance of your business. In hiding things from the taxman (not that you would do such a thing, of course!) it becomes too easy to lose sight of them yourself.
  • Document Capital Expenditure. Rather than expense capital improvements as Repairs and Maintenance, capitalize them. This will add value to your Balance Sheet and improve your demonstrable profit.
  • If you don’t fear Tax, you can present a much better picture to your potential buyer, his Accountant and Bank Manager.

Before the buyer can purchase your business you need to convince his Accountant, who will not approve the price, or even the purchase, unless the figures "stack up". His Bank Manager will not be willing to lend the buyer the money he needs to meet your price without an attractive looking set of figures.

4. Do your housekeeping

Just as with selling any other sort of property, first impressions count. There are a number of practical steps you can take to create a good first impression to a prospective purchaser. They may seem obvious, but then again, look around, you might be surprised.

By taking these steps, you can not only increase the perception of value to your buyer, but also convert into cash and improved figures, many items which would otherwise be handed over at "no value" to the buyer on settlement:

  • Tidy up your stock. Sell off obsolete, or slow moving stock items. This will improve both your sales and your Gross Profit. Your buyer will be impressed that you are not holding any unsaleable stock. And it will eliminate any possible arguments over the valuation of such stock during the sale.
  • Tidy up your Plant, Equipment, and Premises. Make your workplace into an efficient and attractive working environment. What would it look like to a critical new observer? Add a little paint here and there to make things look well maintained.
  • Tidy up your staff. Where possible, get your staff to take up their leave and other entitlements prior to sale. Get them to wear uniforms, and make sure they wear safety gear when required.
  • Tidy up your Debtors. An area of great concern to a prospective purchaser is the state of your Debtors. Based on your figures, the buyer will have to do his cash flow and working capital forecasting to justify the purchase, and may be very nervous about taking on customers who look as though they take forever to pay their accounts. Now is a good time to bring them into line.
  • Tidy up your creditors and even take those early-settlement discounts. This will create a positive impression of the inherent strength of your business.
  • Tidy up your Balance Sheet. It would also help if you could remove from your Balance Sheet any items which are unrelated to the business being sold, and include, possibly through an Asset Revaluation Reserve or similar, any assets which are not currently listed at their proper value.