Interview with Holly Ford

What are the pros and cons of buying a resale business?

When you buy an existing franchise, it’s known as a resale. Generally, you can buy one that is successful and making money, or you can buy one that is in trouble. Either can be an opportunity if you know what you’re getting into.

The Pros

1. You are buying a business that has already invested in the start-up costs—including initial marketing and customer acquisition—so you don’t have to. 2. The organization is established. Systems and procedures are in place. 3. All of the job descriptions, hiring, negotiations, and training of employees are complete. 4. The business is generating revenue, giving you immediate cash-flow. 5. Location has been established and contracted, and all details of the facility design and construction are complete and operational.

The Cons

1. If the business isn’t working due to a bad product or service, inattentive customer service, or slow delivery, you can be starting with a less-than-stellar reputation. 2. Systems and procedures may not be working efficiently enough to achieve profitability.

3. ‘Inheriting’ inefficient employees can be problematic, though curable. More concern should be in preparing for an inevitable 10-15 percent attrition rate when purchasing the business. 4. There may be a declining trend in profitability. 5. A lease agreement that is too high for profitability, or a location that does not attract or retain customers is difficult to change.

What should sellers do to prepare a business for sale?

There are three main areas of focus for Sellers to create a validated business resale; Valuation, Unique Selling Points and Marketing Package.

Valuation: This process determines the value of a company. The most effective method for businesses grossing under $2 million is a Seller Discretionary Earnings (SDE). (Businesses with revenue exceeding $2 million should use EBITDA). You will need to provide your broker with a variety of documents, including taxes, P&L’s, income statements, list of assets with depreciated replacement cost, list of liabilities, etc. So make sure that your books are in order.

Unique Selling Points: What factors separate you from your competitors? These can be industry, market, or business specific. Generally these items are used as factors to create the business’s multiplier.

Marketing Package: Create a business marketing package that includes the business’s results (including SDE), projection of future results, information about the industry and market, location and map, and facts about the franchisor. Also, prepare three years of P&L’s, the lease agreement, and the franchise agreement to go into this detailed package.

How do you, as a seller, get top dollar for your business?

Hire a broker. A good broker often charges an upfront fee for the time and fees associated with the preliminary valuation, industry research, packaging, and lead generation. It’s well worth it. I have been involved in deals that sold for more than double what the seller thought the business was worth. There is much more to the value of a business than cash flow.

Businesses have five critical areas to evaluate: The Industry, The Market, The Business Results, The Product Differentiation, and The Forecast. A good broker will look at these factors when creating the prospectus to attract more buyers and help them see the big picture.

What’s your advice for buyers?

A franchise resale can be an excellent investment. The major costs and work of build-out, initial customer acquisition and retention, hiring and training employees, etc. has already been done. The ROI can be magnificent. A franchisee also has the support of the franchisor, who wants to ensure that the business transitions well so the brand’s reputation isn’t tarnished by a termination, and the royalty stream isn’t affected by a declining franchisee. But I would definitely advise buyers to consult with a franchise resale professional. This expert can help distinguish the best brands and fit and validate both the business and the franchise.

Holly Ford is an award-winning franchise developer and founder of Zarian Firm, an international business brokerage. As a consultant at The Franchise Consulting Company, she empowers her clients with the tools to unshroud hidden value as well as reveal the potential mine fields of a brand. Contact Holly at Holly@TheFranchiseConsultingCompany.com or 513-828-9810.