A franchise for sale is probably the safest option for people that want to start a business.
But uncertainty can never be completely removed from any business – so it is nice to know there is a reasonable way out if things don’t go to plan. This could either be because the business does not make enough money, because you have made a success of the business and want to buy a different franchise, non-franchised business or start your own; or because of a change in personal circumstances, such as illness or new additions to the family.
This is why you need an exit strategy.
But be mindful, if you are planning on remaining in the same industry after you sell up, you will be subject to restrictions.
Euan Fraser, Principal and Managing Consultant at franchising advisers AMO Consulting says:
“Franchises are likely to have a restrictive covenant. This allows the franchisor to protect itself from a franchisee using its intellectual property to set up a competing business.”
“Typically the restriction will last for a period of six months, and will cover the franchisee’s territory and that of any other franchisee in the network.”
Conditions for carrying out your exit are usually stipulated in the franchise agreement, the contract you have to sign when you buy a franchise.
Enter the arena with your exit route in mind
Garry Nelson, Kall Kwik franchisee
Are franchises like cars? Do they devalue rapidly and end up worthless, with little resale value? Or are they like bricks and mortar: their value fluctuates over time, but they have an intrinsic value, which, unlike other commodities, is unaffected by changing fashions?
The answer is that neither analogy works perfectly – but if it is a good franchise, the projections for your franchise value should be more stable, like property.
If you have bought into an established brand, then that brand has a greater chance of enduring than a start-up, where the brand identity has yet to be clearly formulated, let alone become recognised and trusted by the general public.
The longer the brand is established, and the more it is entrenched in the public’s psyche, the more confident you can be of having a valuable business to sell if you need to in the future.
Of course, fashions and public tastes will affect value. And you can be powerless if a brand falls out of favour.
This happened to McDonalds, to an extent, after the BSE crisis, and latterly, negative publicity about the chain’s contribution to obesity, stirred up by the documentaries Super Size Me and Fast Food Nation. The McDonalds franchisee had no way of altering the menu in order to counter the negative publicity. But fortunately McDonalds was savvy enough to placate the hostile public mood, introducing salads and other healthy options to the menu. Regardless of the new range, however, the McDonalds brand was sufficiently robust and well-established to weather the storm, expect perhaps in wealthy areas where the negative publicity resonated the greatest.
So franchisees are passengers to an extent. But the judgement of an experienced franchisor, supported by superior marketing muscle, has a good chance of safeguarding the business in the long term – and therefore its value.
A franchise is unlikely to have such a stable value as property, but the value is unlikely to plummet precipitously, as car values tend to.
Be aware of any weaknesses in your business, as they could adversely affect its value. By planning to improve your operational performance in these areas you can bolster the value of the business.
Areas that impact on the value of your business include:
- Projected profits and cash flow (future earnings are the most common way of evaluating a business)
- The size of your asset base
- Size of your client base
- How clean and well-maintained your premises are
- Whether you have the requisite inventory of equipment needed to run the business
- Whether it is well-maintained
- How skilled, experienced and reliable your staff are
- Size of fixed overheads, i.e., rent, equipment, etc
“Brand recognition, growth potential and profitability,” says Euan Fraser, are the key drivers of a business’ value. “It’s the same for all businesses.”
It is best to keep any planned exit date confidential, to avoid alienating staff or customers. However, Euan Fraser thinks that when the time comes to sell, some franchisees might need to be less discrete than others.
“There’s always a balance between keeping it quiet and letting the market know the business is for sale,” says Euan.
“Each situation needs to be handled differently; your most likely purchaser could be a customer or staff member.”
If you do earmark one of your managers or another member of staff as a buyer, then you know they have a thorough knowledge of the business. This means that they do not need to do any research, thus ensuring a smoother selling process.
Enjoying the spoils
You should be able to have a realistic idea of when you want to sell your franchise and be confident that you will have a profitable business to sell on when that point arrives. “You should ask your franchisor what you can expect in terms of profitability in ten years’ time,” says Garry Nelson, a Kall Kwik franchisee. “That puts them on the spot. If they can’t tell you, then it shows they haven’t got the experience and historical data to help.”
“At the end of the day, you don’t buy one these things to hand this over to family – it’s not like that. It’s not a family business; in a sense you are renting a company for a period of time.”
No matter how much you will enjoy running a franchise – and it is paramount that to some degree you do – you should be able to imagine a point in the future where you can reap the rewards of your efforts. Garry certainly will be.
“I’m selling a Kall Kwik centre at the moment to realise some capital – and enjoy the spoils that I have worked for,” he says.