24 Apr Selling Existing Franchises (Part 1 of 2)
We have commented frequently about the pluses of selling existing franchises. And, as we have also mentioned, the resale of existing franchises represents a small percentage of business sales by business brokers. That percentage would be smaller if we did not include those offices that really do handle them. Those firms that do get involved sell a lot of them, so we know it can be done.
Just to pass on a personal note — In my initial year as a business broker, my third sale was that of an Orange Julius franchise. It was also my listing. I was cold calling, not knowing where my next listing was coming from, when I passed a small strip center. In front of the stores was a free-standing Orange Julius stand. I figured I would see if it might be for sale, knowing deep down it was probably a waste of time. I went up to the service window and asked the man behind it if the owner was in. Looking around the inside, I didn’t see anyone else, so it was sort of a stupid question. Fortunately, he said that he was the owner. So far, so good. I asked if the stand might be for sale. To my surprise, he said yes. I met him a bit later and took the listing. I also discovered that he owned quite a few others. As a result of that cold call, I listed, over a year or so, almost all of them—and they were sold by people in the office I was working in including another two or three I sold.
The following articles are ones that are not new, but supply a lot of information that is still critical in dealing with the sale of existing franchises. They are taken from the current Business Reference Guide and Business Reference Guide Online.
Pricing the franchise resale obviously depends on the franchise. Is the franchise value added or—as in some cases—value subtracted? Does franchising add value to the business or would the same business—independent of a franchise label—bring as high a price in the marketplace? When calculating a multiple of annual sales, is it before subtracting the royalty fees, or are they included in the annual sales? After all, 6 percent of just $500,000 in annual revenues is $30,000, but just $12,000 at 40 percent of annual sales. The $12,000 probably doesn’t have much of an impact on pricing unless the sales are really astronomical.
McDonald’s has always been the franchise that everyone compares others to, but that has changed recently. However, it probably hasn’t hurt the price of a McDonald’s—it is still a very strong brand. One disadvantage of franchising is that, like Burger King, the company gets sold several times, and the direction of the new owners can play havoc with operational support, advertising and growth of the company. In most cases, franchisees have no control over this. The strength of a franchise is the success of the brand name and the reputation created in the marketplace. Many franchises have been able to create that brand-identity and awareness to add a lot of value to the price of one of the units. And, if you want to buy a very popular franchise in a particular geographical marketplace, you have to pay the going rate.
Some prospective business buyers like the security and the support of a franchise. Still others want the independence of owning and controlling their own business. Buying an independent business provides just that. No answering to the franchisor, no royalties and no heavy advertising fees, no forced purchasing from certain suppliers—and no politics. Owning your own independent business also allows you to expand, change, add or delete products and/or services. Independent businesses can be very quick to adjust to changes. Franchises, especially large ones, are very cumbersome and slow to adapt to new trends and ideas.
The choice is a personal one. Some very strong independent operators have chosen, after years of independence, to buy a franchise, while some franchisees felt stifled and changed to an independent business.
As for pricing a franchise, we don’t see much of a difference between an independent business and the franchised one, except for the very big players, where the franchise label probably adds a lot of value, maybe 10 to 20 percent, based on the same gross. On the other hand, the fledging franchise with just a few units has some real problems on the resale side. If it’s fairly new, there are plenty of new units available, the name doesn’t really mean anything yet, and the age old question is asked—why is the business for sale? In cases like this, the percentage multiples might be reduced by the same figure as is added for the well-known brand name—most likely lower.
Despite what the franchise industry would like us to believe, not all franchises are successful. What has always struck us as strange is the buyer who is very number- oriented and turns down a very good business due to some slight anomaly in the financial statement from two years ago, and who will be the same buyer who purchased a franchise (a new one) where he has seen no books and records and has no idea whether the location will work out or not.
Source: The Business Broker
Tomorrow’s posting will continue this subject with “Key Considerations When Purchasing a Franchise.”