Even if you don’t plan to sell your business in the near future, now is still the best time to prepare for the possibility of a future sale. Inc.com states that “the number one mistake business owners make is not starting succession planning soon enough.”
There are a number of things you can do now to ensure that, when the time does come to sell, your business will be valuable in the eyes of potential buyers – and more importantly, that you can realize the sales price you hope to get.
Know your business inside and out
“The number one advice for anyone who may sell their business is to make sure you know your business really well,” said Manny Portuondo, founder of DeepBlue Advisory, LLC, a mergers and acquisitions and management consulting firm in the restaurant industry. “The sale process is lengthy and can be excruciating in terms of getting a deal done. The more the seller knows about the business, and the more he can provide business and financial logic behind the valuation they seek, the higher the likelihood they will get their desired price.”
Portuondo emphasizes knowing what assets you have and their condition, information about the underlying leases and being able to tell a story about your financials.
“What are your sales and traffic trends? Are they growing or not growing and why? Is the market or region not a great region for whatever reason?” he said. “Understand your competitive landscape and the macroeconomic dynamics. Be able to project those into the future.”
Select an advisory team (if you haven’t already)
If you don’t already have an advisory team in place, the point at which you decide to sell your franchise is the time to establish one.
You will need individuals with specific expertise to advise you on the sale in various capacities, from a financial advisor to an accountant to a business lawyer. These individuals assist you in the complex and time-consuming sales process, allowing you to better continue running your business up until the time the transaction is completed.
Some franchisees choose to employ an additional expert during the sale process who can help identify potential buyers and oversee the entire sales transaction, freeing up your time and that of your key staff to continue managing your business.
Review – and understand – important contractual agreements
Two important clauses in your Franchise Agreement are the “First Right of Refusal” and “Right of Approval” clauses.
In many cases, the franchisor will have the first right of refusal, or the first opportunity to buy back your franchise, at whatever terms you may agree upon with a buyer. That means, essentially, that a buyer could do all the legwork of researching your business to prepare for purchase only to have the deal cancelled because the franchisor chose to exercise this option. Be sure to review your Franchise Agreement to determine if this clause exists and, if it does, if the franchisor intends to exercise that right.
Likewise, most franchisors have a Right of Approval clause in the Franchise Agreement stating that the franchisor has the right to approve franchisee successors. Any sale that does not adhere to this franchisor’s right may nullify your Franchise Agreement, so it is imperative to understand the ins and outs of this clause, if it exists in your agreement.
Maintain a good relationship with the franchisor
In the franchise business, “you are in essence leasing a brand from the franchisor for a period of time, and as such, have a responsibility to manage the brand within the standards that franchisor determines,” said Portuondo. “This creates an obligation to collaborate with the franchisor – and having a good relationship is key.”
While you, the franchisee, are only half of the relationship with your franchisor, there are several ways you can work to build a positive relationship, such as through regular communication, being active with the corporate office, making consistent on-site visits with corporate and taking advantage of the franchisor’s resources for franchisees.
Increase profitability – and don’t stop managing your business
It goes without saying that one of the most significant factors in building the value of your business is to increase profitability. While you certainly don’t want to cut corners, finding effective ways to increase efficiencies or decrease costs will be attractive to potential buyers.
“What I see happen often is the seller is so caught up with selling the business that he forgets to manage the business,” Portuondo said.
Until the deal is completed, continue on with business as usual. Don’t avoid making investments you’d already considered or hiring key personnel because you may sell the business. Anything you do will only help bolster value going into the transaction, but anything you neglect can enact downward pressure on your business valuation.
Evaluate your employees
It’s important to have key employees in place to aid in a smooth transition for the buyer. Further, if you have very few key team members with knowledge of the business – meaning most of that knowledge lies in your own head – buyers will be wary of a purchase.
Establishing and continuously cultivating a high-quality workforce will increase your company’s worth. Have a good understanding of the status of your team to assure a buyer that the transition will be as smooth as possible.
Whether you are considering a sale in the short-term, or want to foster a valuable business for a sale farther down the road, following these tips will help ensure you get the most value out of the sale at any point in time.