Think About the End at the Start
Often I discuss with potential franchisees when we meet not only how to start owning and operating a business, but planning their strategic exit as well. This shocks some people, because they’re just starting to explore the business and financial possibilities that come with owning and operating a franchise. However, it is a common axiom that “The only reason to buy a business is to sell a business”. The reason is that business ownership is one of the best ways to accumulate wealth and provide for your financial future. For that reason, there are several compelling reasons why beginning with the end in mind is a smart thing to do for yourself as you start out as a franchise owner.
Operate Lean if you Can
One of the benefits of operating a franchise is that you have the support and experience of the franchisor – not to mention other franchisees. This extra boost is an incredible resource, especially if you have never run a business before.
With a franchise, you get prescribed processes and access to best-practices on how to operate your business – including staffing, which will likely be your biggest expense item. While it could be tempting to have a few extra people on staff, it is important to consider where you can start finding cost savings from the very beginning.
The reason for this is twofold. First, by finding areas where you can afford to cut expenses without sacrificing service you increase your bottom line return. Secondly, when the time comes for you to start exploring selling your franchise, you can get a much more accurate estimate of the overall value of your franchise if you’ve been operating it “lean” for a few years. Potential buyers will want to see 3 years of P and L’s and tax returns so if those final 3 years have good labor costs relative to revenue you can command a better price. While we’re on the subject of price – the cleaner your books are from the beginning the better. And by “clean”, I mean accurate and detailed. Don’t scrimp on a bookkeeper if it’s not your forte.
Play by the Rules
This should go without saying, but cutting corners drastically affects the overall value of your franchise when the time to sell it approaches. According to John Sensiba, Managing Partner at Sensiba San Fillipo, potential problems can range from “anything contractual; what restrictions are there to transfer; any HR issues; have you complied with labor laws?”1 to name just a few. Infractions of any of these, among others, can spook potential suitors, and even more importantly, can land you in hot legal water.
As such, make sure you’re sticking to the legal script and following all of the laws to the T. It’s okay if this isn’t your area of expertise. You have options available to you. You can always reach out to your franchisor to see if they have resources available to you to make sure that things are being done according to the letter of the law. Another option you have is to hire a lawyer familiar with contracts and employment or labor laws. Having the peace of mind when the time to sell comes that you’ve been running a tight, legally sound business will make your franchise look even more attractive in the eyes of your potential buyers.
Final Thoughts
There is another thing that makes your business attractive to buyers that not everyone thinks about. Once your business is cash flowing and performing consistently, you want to have a business that runs itself like a well oiled machine with a manager in place. If you are working your butt off every day IN your business – that business is not worth as much as a business where you are working ON your business (ie business development, networking, etc) and putting in 20 hours a week IN the business
While you are exploring the possibility of owning a franchise, you can often research in advance what kind of multiples this business model has sold for in the past. Another good question to ask of the franchisor is – “what support is offered to franchisees wanting to sell”?
These are just a few things to consider when beginning your career as a business owner. As long as you start with the end in mind, you begin with a much more “clear-eyed” vision of what your future as a franchisee (or as a retiree!) may look like. Ready to learn more? Find out if Your Franchise is Waiting.
1 Upton, Nicholas. Start Early if You’re Eying the Exit. Franchise Times, May 2017.