If you are getting to the point in your business where you realize you want to sell, there are a lot of questions. Today I want to address some of those questions. Selling your franchise can be an exciting process but it can also be confusing and challenging. Over the years I’ve had the opportunity to sell lots of businesses and have learned some lessons that I think will help you to make the right choices when you decide it is time to sell.
(To listen to my podcast episode on selling a franchise instead, click here.)
Of course, a lot of people naturally want to start with the question of valuation. They start by searching for the right valuation method. That’s not a bad idea but you will discover pretty quickly that there are a lot of different methods out there. You have some people who will tell you a business should be worth 1.2 times revenue. Some businesses are valuated at three times profit or EBITDA. Which method is correct, and which one is correct for you?
The actual answer starts with a bit of self-valuation. Before you can valuate your franchise, you have to realize the business is built around you. Your role in the business has to be considered before you can begin to find real valuation for a buyer. How involved will the buyer have to be? How many hours a week will they have to spend to keep it going? Or, will they have to hire someone to keep the business running?
For example, let’s say you are spending 50 hours a week building and managing your business. With 50 hours a week you are making $100,000 a year. That isn’t very attractive for a possible buyer. A larger private equity group wants to increase their cash flow and find something that is already running. The hours you are spending will be a problem. Who will take over that workload? Any potential buyer will have to either hire someone to fill that role or do it themselves. They will have to pay someone $100,000 a year just to keep things running which means they are making zero in terms of cash flow.
Now, let’s say you are spending one or two hours a week on the business. That is a very attractive situation for a buyer because you’ve eliminated the time sink of running the business. Now you are selling a business which can give instant cash flow to that buyer.
So, this is what I mean by self-valuation. What is your time worth? How much active involvement do you need to have in your business. If you don’t have a value on what your time is worth, then your time is worth what you would pay somebody else to do.
I realized myself at some point that I was doing tasks running a business that were worth $25 or $35 an hour. I knew that my time was worth more, so I found the right people and built a team to run that business. Think of it as buying back your time. You need to move from the perspective of a manager to an owner so that you can distance yourself from the day to day. This isn’t an easy process of course.
As the manager you are involved in the details day in and day out. The employees are coming to you every day with questions. Without you to answer questions your employees feel like they can’t make decisions. If you are the only decision maker in your business, then you are creating a decision making bottleneck. If you can resolve to remove yourself from that role you can create value for a future buyer.
Of course, there is nothing wrong with being involved in the details. There isn’t anything wrong with running the day to day and being the decision maker and being the hands-on leader of the business. But if your goal is to sell that business you will need to let go of those tasks. Every one of those responsibilities you “hold on to” you will be handing off to the next owner. You don’t want to saddle your buyer with that kind of role and most people trying to buy a franchise will not want to deal with that kind of role in the business.
One of the first practical steps you can take is a simple one: hire an executive assistant. If you don’t have an executive assistant that means you are the executive assistant. From there you need to focus on building a team of people who understand ownership and can make decisions and are trustworthy.
Integrity and trust will be the key factors in finding those people. They have to have at least the basic motivation to make decisions on their own time. If they don’t, then you are just going to be in the same position where you are monitoring the day to day of the business with a different group of people. You have to find people with an owner mentality. They may not be entrepreneurs themselves, but they get the value of it. They understand the concepts and can support that vision.
You find those people and give them avenues for growth and opportunity. You find the ones that know how to take initiative and do something. You don’t need thinkers, you need doers who can take over the grind for your and get their hands dirty. You need people who you can leave alone for a few days without wondering if they are getting anything done. You know when you check in that they are going to have results because they are trustworthy people.
Just the other day, for example, I was busy recording a podcast and needed two of my team members in a meeting about a new business we are forming. It was a very important meeting and a franchisee was giving us really key information – this was relevant information which was going to be immediately put into practice in our business. These team members aren’t owners, but I just let them know how important it was to learn this information. And it was great, because they have that owner mentality, they got it all done. That’s empowerment. It is where the people on your team are able to be autonomous and get the job done. And that gives you the space to step away from the grind.
So, that self-valuation is really a huge part of selling your business. If you are the business, if you are the ‘unicorn’ that keeps it alive then without you it can’t maintain its historical value. But if you can transition out then you are offering your buyer a huge cash flow opportunity. You are not ‘selling them a job’ but you are actually selling them a business. In the beginning none of us got into this business so we could hustle and grind it out for decades. We got into this so we could hand off the hustle and sell our business, diversify and move on to buy our next brand.
So I think it’s been good to cover preparing to sell your franchise, but there are still so many factors that go into actually making a sale. I want to continue to talk about this in my next article, so watch for part two of this next week. In that article I will cover all the reasons and motivations for selling a franchise. There are so many different reasons why you could sell and we will go through those and hash out details of why and how you can make that sale successful and profitable.
