Planning your exit – Why you should sell and how to do it.
We often say that you should have your exit plan figured out when you make the decision to buy a franchise. You may think that this is odd as, after all, you are only just starting, but having an exit plan will influence the decisions you make at each step of your journey. Here, Natalia Shvarts looks at the importance of planning your exit, who might be involved, and what the process looks like.
Knowing your exit plan will allow you to set your short term and long-term goals. When it comes to exiting a franchise business, there are essentially only three options.
- Termination where one party is in breach of the franchise agreement,
- Non-renewal – which is essentially closing doors and walking away; or
- A sale – the only option where the franchisee has the opportunity to obtain a return on their investment.
With the above being the ultimate choice, a sale would seem like a no brainer! So, what should a sale look like?
Who is involved?
Your franchisor – as you will be exiting the franchisor’s network your buyer will become the new franchisee and they will need to meet the franchisor’s criteria and therefore be approved by the franchisor. This is one of the reasons why you need to engage with your franchisor early and understand what the process looks like.
The other third party to consider and get involved sooner rather than later is your accountant. Make sure that your accountant is aware and understands your plans so that they can advise you as to how best to structure the deal.
A sales broker – you may wish to consider using a sales broker not only help you find a buyer, but a broker will also usually offer a business valuation service, the preparation of a sales prospectus, they will actively look for buyers and qualify them as well as negotiate the price. There are a number of brokers on the market who specialise specifically in sales of franchised businesses, so certainly something to consider.
A franchise solicitor – unless you need preliminary advice on the actual structure of the sale, you don’t need to instruct a solicitor until you have a buyer, but this is not the same as choosing one of course! We would always recommend that you use a solicitor experienced in franchising because, after all, you are selling a franchised business and therefore there are the nuances which are specific to franchise sales!
The first place to start is your franchise agreement since this ought to contain the process and conditions that you will be expected to satisfy. At this point it would also be worth speaking to your franchisor to find out if they have a process they’d need you to follow – most established franchisors not only have a process in place but will also insist that you use their standard documentation which should save you time, money and hassle!
A successful exit is something that you need to plan for so there will be several stages to the sale process, namely:
- Preparation stage – this is the initial stage of planning, getting “your house in order”, making sure that your business is in the best position possible for a sale. Remember – your business will be valued depending not only on your revenue or turnover but also on how compliant it is with the franchisor’s system, with any external regulator (if applicable), whether you have the right staff in place. So, in order for you to achieve the best possible price, your business must be in the best possible shape and stay in that shape!
- Valuation and getting ready to sell – this is the stage where your business actually goes on the market!
- Finding the buyer – this may take time depending on the price you are looking to achieve. The higher the price the smaller is your pool of potential buyers. And don’t forget – they also need to want to buy a franchise and be approved by the franchisor.
- The legal process – once the buyer is found, this is when the legal process will commence. How long this takes will also be determined by whether or not the buyer is seeking external finance. A big part of this last step is due diligence. This is the part of the process where the buyer’s solicitor will be raising enquiries and the buyer will essentially (whether itself or using its advisors) will want to investigate and check out the state of your business. The more prepared you are for this, the quicker this stage can be completed. This requires you to be organised and to have documents in place ready to be reviewed.
The franchise agreement will set out what fees are payable by you to the franchisor on a sale – this usually will include a fee for approving the buyer, a commission if the buyer was introduced by the franchisor and a contribution towards the franchisor’s legal costs. You should factor these in when setting the sale price and budgeting for costs. In addition to these fees, there will also be your accountants’ fees, solicitors’ fees and the sale broker’s commission.
The truth is that from start to finish a sale can take anything between 18 months and 2 – 3 years on average (although, of course, there are exceptions to every rule!) so preparation is certainly key. What is also important is that during this entire process you continue to drive your business to ensure that it continues to grow and perform. The deal is not done until completion is done and dusted so you really cannot take your foot off the pedal until then.
Selling a business does not happen overnight and what you get out is very much what you put in so start planning for the exit in good time to ensure that it is the exit that you want!
By Natalia Shvarts