How to sell a franchise that has started to fail due to unforeseen circumstances
If the past few years have proved anything, circumstances can change at the drop of a hat when you own a franchise. Preparing for foreseeable expenses such as quarterly VAT bills, your management service fee, or corporation tax can be accounted for in the business plan.
Author: John Hatt, Managing Director of Business Partnership
Unforeseen situations, like the pandemic or Brexit, can leave your business with serious long-term cash-flow issues and affect your return on investment, which ultimately forces some franchisees to sell.
Accepting that your business has started to fail is always difficult, especially when things go wrong that are out of your control. You will have thrown your full weight behind ideas and strategies to turn things around, but, unfortunately, nothing has been able to pull you back from the brink, and now there is no option other than to sell.
There is, however, still hope of getting a reasonable price for your business.
Valuing a failing franchise When selling any business, the first thing to do is find its value. When valuing a franchise that has started to fail, an excellent place to start is to find out the total cost of a new franchise, including the price of the business and any required investment in equipment or refurbishment of the building. This is an entry point for anyone interested in that franchise.
If you have a retail franchise, for example, the good news is your unit may be more valuable than you realise, as good contracts and well-maintained equipment or other similar assets can help the price of a business.
If the franchise you are trying to sell is growing and the turnover is increasing but currently unprofitable, you will need to provide some forecasts to show that the future is looking better. Suppose your business has faced temporary issues, such as roadworks which reduced footfall to the business but is expected to recover to previous profit levels soon.
In that case, you might take a 15 per cent discount from your valuation. You will then be expected to provide historical accounts and fully explain the situation to give the buyer a full understanding of the circumstances.
I recommend researching your industry and finding out what other struggling businesses have sold for. Do not forget there will be additional franchisor administration costs for whatever value you arrive at. If that tips the balance of funds into a negative, you could also estimate the business’s liquidation value.
If that is the case, the safest thing to do would be to speak to a professional insolvency practitioner who can advise on this.
How to maximise your sale price To ensure you succeed in negotiating the sale of your failing business and get the very best deal, it is crucial to have all the necessary skills required to close your sale. Selling a business is a process that takes finesse and sensitivity, as well as grit.
Despite you being on the back foot when selling a failing franchise, you should never let on. First, I recommend you set out clear negotiating goals for selling your business to help you answer critical questions and guide your negotiations when selling. Then put together a negotiation strategy. By being proactive and planning a strategy, you will stay ahead of the curve.
Also, when in communication with a buyer, despite the fact that you need to sell, make it clear you are willing to walk away from a deal if it is not up to scratch. As well as this, always try to lead the discussions. This way, you will be in the driver’s seat throughout the sales process.
It is also crucial to ensure you know your numbers and everything about your accounts. Have you ever seen Dragons’ Den when the person pitching cannot remember his figures? Never be that person.
A prospective buyer usually requests to see records of three years’ worth of trading, so even if it’s a while off selling, make sure your accountant can advise on how best to present statements. Items of interest could be increased profits, a consistent but varied client base, and regular revenue growth.
Finally, when it comes to selling your franchise territory, believe in yourself! Your business has not started failing because you are a bad owner; it started failing because of events no one could predict. If you are not upbeat, positive and, most importantly, passionate about your franchise, it might be more difficult to sell the business.
Keep in mind all your business’s best assets and ask yourself what would interest your prospective buyer. Following these tips, you should have no problem maximising the sale price of your franchise. Good luck!
About the author John Hatt is Managing Director of Business Partnership, a national franchise network of regional offices connecting business sellers with business buyers.
With over 20 years of experience helping businesses sell quickly at maximum value, Hatt understands the practical and personal issues involved in selling a business.