Franchising is a new approach for selling mid size businesses that may otherwise be hard to finance in a traditional sale. Franchising in these situations allows each of the locations of the business to be sold as an independent business and to get financing on a piece by piece basis. Franchising your business in these situations can be very beneficial and help combat the biggest hurdle to the sale of many businesses, financing.
Without financing for a new buyer, the sale price of a business would often be adjusted to compensate. This has led to the necessity for vendors to carry back financing on the sale of their business to keep the value of the business. VR Business Brokers, Sunbelt Business Brokerage two of the main business Brokerages in North America and the International Business Brokers Association all refer to the necessity to take back vendor financing to help sell the business or gain a higher sale price for the business.
A business interested in selling should compare its new value based on franchising some or all of the enterprise against a current valuation if sold as one piece. While the initial reasoning is to explore a method to sell your business. Turning your business into a franchise has benefits; the value of the business can be increased when factoring in the estimated value of the business split up in parts and sold as franchises, plus the value in the resulting franchise system and ongoing revenue as well as the value in potential growth opportunities may dramatically alter the worth of the business.
So what do you do when thinking about selling your business and you think that franchising can be an option for you? Call in a franchising expert to check a franchising strategy for the business and compare the potential value as a franchise versus a valuation for the business as it now stands.
Think of the television show Income Property, on the show host Scott McGillivary evaluates a house for the potential of converting an area (usually a basement) to an income suite. He starts by calling in a Realtor to evaluate the value of a property, he presents two plans for an income suite to the home owner both with varying costs and potential revenue. The home owner decides on one of the two plans or not to go ahead at all. He then proceeds to call in a Realtor at the conclusion to give an updated evaluation once the suite is complete.
The evaluation for franchising is quite complex depending on the nature of the business and the structures in place. This evaluation needs an in-depth analysis to present a workable plan. In the case of the business, the resulting decision to franchise comes at a cost of time, effort and money with a resulting potential benefit once achieved. Armed with this information a business owner can then go ahead with knowledge.
Benefits to turning your business into a franchise system to sell out:
1. Increases the worth of the business: If you’ve built your business for years selling out is cashing out but at what multiple. Earnings multiples on businesses are generally low accounting for the risk. Franchising may dramatically increase the value of the business.
2. Spread the risk: Franchising in pieces increases the investor pool that would be putting in their own money and equity.
3. Financing: Getting financing for the sale of the company can be difficult in those situations achieving multiple smaller small business loans through the government guaranteed loan programs is sometimes the only method to fully cash out without carrying back loans to a new buyer.
4. Ongoing income: By franchising the business you are gaining an ongoing source of revenue. Alternately if the end goal is to completely sell out, selling the franchise system will yield extra revenue.
5. Continuation of your business: It’s hard to give up something you have built, by franchising you do not have to give up your identity that had developed out of the business, if you choose to stay operating the system while selling off pieces as franchises.
6. Maximize value: By shedding the unprofitable areas over time and gaining full price for profit centres the valuation may increase. Think of all of those movies such as Wall Street referring to breakup value of companies.