Franchise Advice
site location for success, what is the status of the real estate? Will there be any issues with the continuation and reassignment of the lease?
• Is there anything that has not yet been disclosed to you that might hinder the business? Make sure to ask this question directly so that your solicitor can include the answer in the purchase contract to protect you.
“Gain a strong understanding of all aspects of the franchisor’s business, including fi nancial health, ethos and culture, innovation, and route to market”
The above information is important and the answers to these questions will have a signifi cant infl uence on your fi nal decision. When undertaking your research, you will need to talk to both the seller and franchisor to gather further information as part of your due diligence. In addition, you must also meet the franchisor and conduct a complete investigation of the franchise just as if you were going to
launch a new franchise territory. Attend franchisor discovery events. Gain a strong understanding of all aspects of the franchisor’s business, including fi nancial health, ethos and culture, innovation, and route to market. Do high-street banks support fi nancial backing for the franchise? Ask to meet existing franchisees to assess their experiences and successes within the franchise.
Check other aspects of the franchisee’s business, too – for example, their local reputation and customer service feedback. This will provide insightful information as part of your decision-making process.
Weighing up the options It is important that you should ask the franchisor to confi rm the information that you have received from the seller. The franchisor would by no means wish for you to invest in their franchise under false pretences. If the seller is being liberal with the truth, you will often pick up clues from comments made by the franchisor. It is worth noting that, as standard practice, franchisors will undertake their own recruitment and franchisee selection process regarding applications to purchase franchise territories, including resales. Assuming the business is currently successful, the valuation should be relatively straightforward, as you will have existing trading and earnings fi gures to refer to. The best method is a multiple of
the net cashfl ow you will receive from the business. Some franchisees run expenses through their business that you may not require to operate your business, such as company cars or specifi c business loans. Consider the salary costs associated with the current owner. Take the net income of the business and add back any unnecessary expenses to determine the true net cashfl ow you can expect.
Calculating costs Resales: in brief
• A franchise resale can provide an already solid business and an established customer base
• Check why the franchise is up for sale. How has it performed over the past few years?
• Speak to both the seller and the franchisor. Ask the franchisor to confi rm what the seller has told you
• Do your research just as you would with any other franchise opportunity. For instance, ask to meet existing franchisees
• Find out the franchise’s reputation in the local community, if applicable • If the franchise isn’t performing well, will a simple change of ownership fi x it? Or are there other factors to take into account?
Charlie Dickson is a franchise consultant at Ashtons
Franchise Consulting. He off ers advice and guidance on franchise sales and resales from the initial enquiry.
The price of this type of successful business should be between two and fi ve times its net cashfl ow number: the more stable and dependable the net cashfl ow, the higher the multiple that you can reasonably expect to pay for the franchise. The multiple may also be higher when the trends and forecasts of the business growth are positive rather than fl at or negative. With the second type of resale, when the business is not currently performing as well, it is more diffi cult to calculate a purchase price. The existing owner will always have many good arguments about why the business is not performing as successfully as it should, but ultimately it comes down to whether you are convinced that a simple change in ownership can rectify the problems and give you a real opportunity to build a profi table business. The only time this is true is when the existing owner is not operating their franchise territory according to the model designed by the franchisor. If you have confi rmed that most or all other franchisees following this particular model are performing well and profi table as a consequence, and you have determined there are no other problems related to (for example) a poor location, then you can proceed with confi dence.
May 2018 |
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