One day you will exit your business; hopefully, it will be a planned exit.
Sometimes business exits are not done in a way that suits the owner out of necessity but knowing you will exit at some point, let’s discuss how you can probably exit at much higher values through franchising than you might do otherwise.
For years, a standard way to value most traditional business models was a multiple of net profit, maybe a multiple of 1 to 2.5 times, however, it is a fact that most businesses do not actually sell, and indeed if they do, they largely sell for 1 to 1.5 at best. There is a better, proven way to exit than this lowly figure, though.
Franchising Your Business Gives You Higher Business Valuations
Why would this be the case though, let’s explore this in more detail…
- You have your own business; call it the corporate site for now (soon to be head office). This carries on as normal, giving you revenue and net profits and hence the value that is put on this at the exit, as you have just read above.
- Once franchised now you can sell an area, “territory” that will not strategically impact your own site, and receive an incoming fee for that privilege, this will be a franchised site. Do this multiple times over, and you can now show that you have the capability to sell multiple sites across the UK, and maybe beyond, and the market size will only cap this ability. The good news for you though is that this can be valued!
- With your franchised areas that are sold come fixed fees or percentage royalties (ongoing fees you receive from your franchisees) for a period equal to at least the franchise term and beyond on renewable agreements. Once established, calculations can be done to equate this to real-life figures, so you know what each franchisee is worth to you as a lifetime value proposition; more good news for you because this guaranteed element can be valued. Any business that can obtain residual income becomes very interesting to investors!
Act Like A Franchisor Rather Than A Business Owner
- Now let us look at what can be valued for areas that you can still sell, but you have not managed to do so yet! Think about the unsold areas; you have read this right! Say there is the potential to have your franchise network to 100 franchisees, and you’ve sold 50, that means 50 lots of franchise fees that an investor can still sell; this then does have a value that you can sell today.
- In addition to the unsold areas, once they are sold, they will also bring in the royalties that by now you will know what that is worth to the business. So again, a figure can be put on guaranteed royalties that your investor will see where they can add value and pay you for that privilege today.
We could also touch on kickbacks that your business can obtain as an introducer of new business to your suppliers and mark-ups on branded items. Again, these can have an exit value, but not mentioned in this short report to focus on the core areas instead.
Hopefully, now, you will see that your business does not need to be sold as one unit, and the standard way to value it that is purely historical. But why would you franchise it?
It has to be said that any business should only be franchised if the owner truly wants to do so. If they believe that the model can be replicated and they are in a position to support franchisees. Failure to do this will mean that there is only short-term gain. Franchising really is a long game; the rewards will certainly increase the more established you become.
How Do You Franchise Your Business?
Do call in a franchising expert. They will discuss with you the merits of whether your business should, or could, be franchised, work out the modelling for you and ensure any documentation to get yourself franchise ready is completed before you go to market as a new franchisor. If you are still unsure on whether you should, do some research on the franchise portals and look to see what businesses are on there that are similar to yours and have franchised, look at what they ask for in franchise fees and how many units, or franchises, they have sold, this might give you an indication, but it is also fair to say that in the UK anyway, there are only around 1000 franchised systems currently in operation, and this is nothing compared to other developed countries, we have a long way to go!
Join 1 Of Only 1000 Franchises Currently In Operation In The UK!
In current times, many businesses have also had to pivot, could franchising your business be another way to strengthen your business risk? Whether you like the idea or not, it would take a fair argument to suggest that this is not a real option to give you further business security!
And finally, whether you want to exit or not, maybe franchising your business is still a viable way to improve it anyway. Now think about that!
This article was written by Richard Pakey, who is a franchising expert and Regional Director for the award-winning Lime Licensing Group.
