Are You Ready?: A 9-step Checklist for Selling Units
You think you're ready to sell? You're mad and frustrated with your franchisor? They don't care or understand your struggles? Maybe you're ready to retire or just to do something else. When is the best time to sell? Do you know what your concept is worth?
The worst time to sell is when a broker or another franchisee calls and makes you an offer. This can literally leave millions on the sidelines. What would you do differently if you knew the world would end in 30 days? Think about it. No savings! Maximize your spending and die broke.
More realistically, if you're thinking of selling your franchise in the next two years, start planning now. It's simple stuff.
- Clean up your financials. No personal spending of any kind. No boats, planes, or cars. Present the buyer with clean financials that leave no doubt as to what they're buying. I reviewed another franchisee's P&L recently. The company was paying for everything. He charged every personal credit card and household expense to the business. This lowered his profitability and cut the value of his company by almost 50 percent. These financials should map directly back to your tax returns with detailed explanations on any discrepancies. Present a three-year growth and development plan. This will assist the buyer in negotiating a favorable position with the franchisor and their bank. Hold the buyer by the hand. Let them know of successes and difficulties within the organization. Share your learning and struggles. This will set up the buyer for success.
- Have a realistic expectation on your valuation. Talk to other franchisees and industry brokers on current values. Talk to franchise lenders on what values they are seeing. Understand the struggles a buyer may face with funding. This will directly affect the purchase price and terms.
- Are you selling your real estate? Do you know the cap rates associated with your brand? I track the real-time value of my business by concept. Every period, I'll track the real-time marketable value so I know the perfect time to potentially sell or reinvest.
- Make sure 100 percent of all revenue is properly posted on the P&L. It should match the royalty and sales tax reports to the penny.
- Run your cost of goods. Hold managers accountable to your ideal cost. Watch waste, spillage, and free items. Keep in mind that every penny you save will hit the bottom line. This will increase your EBITDA and your purchase price.
- Cut any unnecessary labor and overtime. Replace poor salaried managers with lower-paid shift managers. You typically hire professionals to help you grow. If you're selling out, replace them.
- Do what the "big boys" do. All franchisor and broker offerings put together a confidential information memorandum or a "book of business." This offering will contain every aspect of the sale, including a non-disclosure. The last thing you want is for your employees to hear about the sale from anyone but you. In reality, there is little to no change to anyone's employment status, but employees will feel betrayed and will focus on nothing but the pending transaction. Include the proposed transaction and structure. Consult with your CPA on the tax implications of your sale.
- Develop a plan for your next steps. What will you do for a living? How will you invest the proceeds? I recently spoke with an owner who was selling out. His plan was to take a position with the buyer at a package considerably below what he was earning. He had no idea how much money he was currently earning. When he added his salary, car, bonuses, and "perks," it was more than three times what he thought he was earning. I've personally sold entities and moved the proceeds to outside investments that completely failed. Remember, you're an expert in what you used to do, not in what you're going to do.
- Learn how to say no. If the deal isn't perfect, walk. Years ago, I was tripping over "red flags." I was so focused on the transaction and the dream of doing something else that I ignored little comments, weird behavior, employee concerns, and numerous other issues. I moved forward and within 90 days, the buyer had stripped out all the cash and assets. It took two years and several hundreds of thousands to resolve.
David Ostrowe is a multi-unit, multi-brand franchisee whose companies include Blazing Partners, 180 Business Solutions, and O&M Restaurant Group.
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Multi-Unit Franchisee Magazine: Issue 4, 2018