Understanding Deal Value in Franchise Sales: Expert Tips for Maximizing Profit

In the franchise industry, understanding the deal value of a franchise business is paramount for owners considering an exit. Ryan Whitfill, a partner at CM Law, shares insights on assessing deal value, maximizing profitability and avoiding common pitfalls. Here, we delve into his expert advice for franchisees looking to secure the best possible outcome in the selling process.

When it comes to defining deal value, Whitfill notes that understanding what exactly is being sold is the first step: “Are we talking about a franchisee who has one franchised business that they want to sell? Or are we talking about a franchisor who has a franchise system with franchisees underneath them?” The distinction is significant, as each scenario brings unique considerations. This article focuses on franchisees who own a single unit or a limited number of units and are considering selling their business.

“In my experience, you’re typically going to value your business when you’re looking to sell it based on some multiple of earnings — whatever, three times, four times, five times,” said Whitfill. “Even something of that nature is how you’re typically going to value it.”

For many franchisees, understanding the multiple of earnings their business commands in the market is essential, as this number can vary greatly depending on factors like industry trends and financial performance.

For franchisees looking to maximize their deal value, profitability is king. “The bottom line is, what is the profitability of the business?” Whitfill said. “The principal thing that a franchisee should do is look to maximize their gross sales and their profit margins because that is the bottom line of what most buyers are going to look at.”

Whitfill emphasizes the importance of a solid financial foundation. “All those things are really geared toward having as best you can a really good gross profit number or gross sales number and that profit number at the end of the day,” he said. It’s critical for franchisees to focus on sales as well as on efficient operations, which can enhance profit margins and overall business appeal.

Whitfill also acknowledges the role of market conditions in determining deal value, explaining how economic shifts can affect buyer interest and financing options. “If the economy as a whole is lagging, it’s going to be more difficult to sell a business because there aren’t as many people out there looking to buy,” he said. “Whereas when the economy is moving, people feel like money is flowing freely, lenders are lending money more freely, and you’re going to have more people that have the resources and the financial capabilities to come in and buy a business.”

Transparency is vital, and a lack of it can be detrimental to a sale. “Trying to hide things and keep the ‘warts’ of your business under wraps — a lack of transparency with your potential buyers would be a big negative because most buyers are going to do some due diligence,” he said. “If they find that what they’ve been told is not accurate, it’s going to hurt your credibility and your ability to get a deal done.”

Whitfill recommends honesty about both the positives and the negatives of a business. “If you’re transparent about both the good and the bad of your business up front with a buyer,” he said, “then you can also make the argument, ‘Hey, I priced those things into what I’m asking, and I think this is a fair price, standing those negative aspects that now we both know about and are on board with.’”

In short, transparency can streamline negotiations, help avoid surprises and ultimately lead to a smoother transaction.

For sellers, minimizing legal exposure is also crucial. “What you want to do legally from the seller’s perspective is just, as best you can, limit the reps and warranties that the other party is getting in the contract,” Whitfill said. “You want to say, ‘Hey, look, I’m selling these things as-is. I’m not making any particular warranties or representations about anything.’”

He advises franchisees to aim for an asset purchase deal, where they sell only the assets of the business without transferring liabilities: “If you want to really have a cleaner transaction that gets all of the liabilities of the business off your hands … you would want to try to do a stock sale or a membership interest sale … where the buyer takes on, not only the assets, but … also the liabilities of that business.”

“My best advice for someone looking to sell a franchise business is contact business brokers and get input,” said Whitfill “Hopefully, you can find one that you like, that you trust, and can give you good advice on valuation issues.”

In essence, selling a franchise is about transparency and securing knowledgeable support to help navigate the process. With these insights, franchisees can approach their sale with confidence, ensuring they understand and maximize their deal value.