Franchising and Consulting
We work with several franchise companies who want to expand into our area. We will only provide you general information on franchises that we feel are excellent opportunities. And, we only work with franchisors who we know will follow through in providing all of the necessary information.
You decided to sell your franchise business and take a different direction in life. Most times people selling a business have had a positive experience and are transitioning toward another exciting venture. Occasionally it is simply time to sell or transfer your business as provided within the franchise agreement so all parties can move forward. Either way, we wish you the best possible success in the future.
The following discussion is not intended to be a comprehensive guide to selling your business, or to replace the advice of legal and financial professionals. Before you offer your business for sale and throughout the due diligence and sales process, we recommend you seek both legal and financial advice to ensure your deal is properly constructed from the beginning.
What are you selling?
When selling your business, typically you are not selling your ‘company’, which is a legal entity that identifies your business (such as Acme Enterprises, LLC). The buyer does not want to assume the liabilities owned by your company (such as payables or customer service liabilities), but seeks to start fresh on the day of closing.
The most common sale of a business is an Asset Purchase where you sell all the assets owned by your company. Assets may include equipment, inventory, leases, property, goodwill, etc. A legal entity owned by the buyers purchases your assets. After the sale, the legal entity that is your company continues to operate for some period to satisfy its liabilities. Some companies remain in existence for years following the sale of their assets.
When selling the assets of your company you are not selling the right to operate a franchise. When signing your original franchise agreement, you were licensed to operate the franchise business. Only the franchise company has the power to transfer the license. This transfer requires that the buyer be fully disclosed by and acceptable to the franchise company. Your franchise agreement outlines the process and fees associated with the transfer of your franchise license. Please refer to your franchise agreement for details pertaining to the transfer process.
What is included in the sale?
Unless you indicate otherwise, the buyer receives everything necessary to run the business. This includes all equipment in ‘as is, where is’ working order, all leasehold improvements, all tools in ‘as is, where is’ good working order, installation supplies, owned real estate, owned vehicles, brand identity on building / vehicles / marketing materials, computers including operating software with all business files, spare parts, jobs scheduled after the date of closing, marketing materials and assignments, ‘as is, where is’ furniture and fixtures in good working order, and more. Minimal product inventory on hand as of the date of closing is typically included.
Alternatively, a significant amount of product inventory on hand as of the date of closing is sold separately at closing for cost. If you own items in addition to those required to operate the business (a car or additional tools or equipment) you may add them to the offering, sell them separately, or use them to negotiate the final deal.
What is it worth?
A company at breakeven or less has little value other than the present day value of its assets and their relationship to the cost to start the business new. Take a complete inventory to establish the market value of the used assets itemized in the ‘What is included in the sale’ section above. Keep in mind that equipment and real estate on lease have no saleable value. Their value is your ability to assign the remainder of the lease to another to stop making payments. Leases are assigned to the buyer at the current or a new rate negotiated with the landlord according to the lease terms.
Compare the current market value and condition of your assets to the cost to acquire them new. Somewhere between is your asset price. To this price you may add:
- A discounted value of the territory assigned by the franchisor.
- The value of inventory on hand as of the date of closing.
The grand total of assets plus territory value plus inventory is your Asking Price for the business. Companies operating at or below breakeven are typically priced below the cost to establish the business from scratch.
When selling a profitable company, the asking price is typically calculated as a multiple of EBITA (earnings before interest, tax and amortization). Using the most current year end or rolling twelve month Profit and Loss statement, identify the operating income of your company. To operating income add the annual values for interest paid on the debt, prepaid taxes and amortization costs. This is the EBITA of the company. The asking price typically ranges between 2 and 4 times EBITA and includes all corporate assets, territory and minimum inventory discussed above.
To the EBITA number you may also add back extraordinary expenses you charge your company but expenses that would not be incurred by the new owner such as unusual medical insurance premiums, vehicle expenses, cell phone or travel expenses not directly related to the business. The adding back of extraordinary expenses increases the company’s EBITA and resulting asking price.
Having established an Asking Price, more often than not you will negotiate the final selling price. In preparation, you need to calculate the Walk Away Amount. The Walk Away Amount is the net proceeds you receive at closing minus the payables remaining after operations cease (or how much money will you walk away with). These may include:
- The transfer fee to the franchisor if not added to the selling price or paid directly by the buyer
- A selling broker’s commission
- Outstanding payables from operations
- Outstanding debt
- Pro-rata share of rent or vehicle lease.
Never engage in price negotiations until you have carefully calculated the Walk Away Amount.
Why are you selling?
One of the most important steps in preparing to sell your business is to prepare answers the following questions:
- How long have you owned this business?
- How has the business treated you and your family both financially and emotionally?
- Why are you selling the business and why now?
- What is the most difficult part of operating this business?
- What would you change about the business if buying it today?
We suggest you write down the answers to these questions. Then, review and edit them over several days until you are certain the answers are truthful and complete. When discussing the sale of your company with any person, use only the answers you prepared and use them consistently.
There must be a reasonable and understandable reason for you to sell a perfectly good enterprise. Common reasons include health issues, divorce, relocation and retirement. The buyer can immediately understand the reason for the sale and will move forward to evaluate the opportunity. When the seller does not state a clear reason for selling or expands the reason from one conversation to the next or provides contradictory reasons, the buyer will sense the unknown and typically not move forward.
There are ways to present the fact that you simply do not like the business or are not doing well. Openly explain what you do not like and why. For example: ‘I do not like working the hours required’ or ‘I do not like managing employees’, or ‘I am not good working with customers’. Explain what is required to operate the business well and profitably. The buyer will compare their skill set to your experience to decide if the business is attractive and move forward to investigate further.
A clear, consistent and understandable reason for selling a perfectly good business is your cornerstone to the sale. Without it, no financial record or price adjustment will get the deal closed.
How to sell
Following agreement with your family, partners, investors or others that your company is for sale, formally notify the executives of the franchise company. Most franchise agreements contain a right of first refusal clause that should be resolved before going to market. The franchisor may also know of candidates that may have interest in your operation or may provide other services through its franchise development department. The franchise agreement also addresses the terms and conditions under which your license is transferred, the related fees, qualifications of the buyer and the approval process.
A representative of the franchise company must be available to properly disclose the buyer regarding the franchise agreement. There may be an additional fee for these services. Finally, both buyer and seller want approval of the transfer from the franchisor prior to closing.
Should you solicit the assistance of a local business broker ensure your agreement is non-exclusive and the commission percent is competitive and acceptable. A non-exclusive agreement clearly states that the broker is paid only when they produce a buyer through their personal efforts. Should you sell your business to a buyer not generated by the broker (for example a buyer produced by the franchise company), the broker is not due commission. Without a non-exclusive agreement, the broker is paid a commission regardless of who generates the buyer.
There are ways to advertise your company for sale locally. Print is the traditional medium with most papers and online services offering a Business for Sale section weekly.
Networking with business associates is a great way to locate a buyer. In particular, lawyers, bankers and financial managers are those most likely to know individuals interested and capable of purchasing a company.
What you need
During the sale and due diligence process, at minimum you will need to produce the following information and forms. Prepare these prior to offering your business for sale.
- Confidentiality Agreement: where by the potential buyer agrees to keep all detailed information regarding your company confidential among only those advisors assisting in the evaluation of your company.
- Clean current and historic profit and loss statements: A clean and current financial statement is prepared according to generally accepted accounting principles using the format provided by the franchise company. You may highlight unusual and / or non-recurring expenses for the buyer to consider such as: significant personal expenses charged to the company, the lump sum expense for capital items that occur seldom. You will typically provide the most current profit and loss statement and three prior year’s profit and loss statements and federal tax returns.
- Sales certification: most buyers will ask you to provide a statement from the franchise company validating the gross sales reported to confirm the sales stated in your financials.
- Lease assignments: provide copies of real estate and equipment leases highlighting the terms and conditions under which the lease is assigned to the buyer. Related assignments of phone numbers, pre-registered or pre-paid marketing events or customer files are helpful as well.
As you reach agreement with the buyer, if you have not previously done so, recruit the advice and participation of an attorney and accountant.
At minimum, the attorney should review and approve:
- Confidentiality agreement
- Letter of intent and deposit
- Buy – Sell agreement
- Conduct the closing
- Lease assignments
- Establish and manager escrow account
- Hold harmless and indemnification clauses
You will need the advice and participation of an accountant early in the process to:
- Prepare financial statements for buyer’s review
- Calculate outstanding payables, liabilities and Walk Away Amount
- Structure the buy-sell agreement to minimize tax impact
- Research how to realize loss or gain from the sale
- Terminate employee relationships
- Close the corporation
While many of the items previously discussed may be prepared by business brokers, franchise staff members and even the buyer, we never recommend you sell a business without the advice and active participation of trusted legal and financial consultants. While costly, their involvement in the process will maximize the amount of cash you receive and minimize liabilities you may incur following the sale.