Franchise Your Business – How to Sell Your Company
Selling a business is a unique transaction. In many cases, emotions overcome one’s ability to look at facts and reason and come to a price that would make sense in order to complete a transaction. With this in mind, many businesses are not saleable at all, they simply lack the cash flow, documentation or structure to have any value to a buyer. The value of a business depends on many elements and typically the simplest, most straight forward way to determine what the price should be for a business transaction is to hire an independent appraiser to place a value on the company. Easy ways to ballpark the value of your business are 1.5 times net cash flow for a year plus the depreciated value of the assets if you are a fixed location business, or 1 year’s worth of revenue if you are a service business. In the current economic climate you should also expect to factor in at least a 20% discount to whatever pricing you end up with.
What kinds of things will help your business sell for more:
- Documentation – the better your books, records and documentation that you are actually doing the sales you claim, the higher the price. A good buyer will want to see tax returns, bank records and detailed Profit and Loss Statements. The less you have, the less you should expect in the sale of the business.
- Net Cash Flow – particularly in high volume, low margin businesses, the net cash flow will drive the price of the business. The more free cash flow you can show each month, the better your business will present and the higher the price you can ask.
- Brand – a brand has a larger value because it offers something transferable. Develop your brand and buyers will see that there is value in what you have created and what your business stands for. This takes time, money, marketing and commitment to educating the market as to what your brand stands for.
- Consistency – people buying a business want to see consistency. So many entrepreneurs make erratic moves with their business, documentation and records that it causes concern for someone considering the purchase (Filing new business entities every three years, etc). If inconsistency is unavoidable – document everything with detail and be prepared to provide reasoning.
So how do you increase these numbers and get more for your business? Why do franchise systems and franchised businesses sell for more? A franchise system with good documentation and consistent royalty income can sell for as much as 12 times net cash flow if it has shown there is opportunity for growth and has market potential. Why do pharmaceutical and some tech companies sell for enormous valuations in many cases? It typically comes down to scalability. How well can the buyer scale the investment they have made in your business and turn their investment into something much larger. It is this reason why franchising has become the vehicle for growth in so many industries – it turns a traditionally non-scalable concept into a business that can be grown exponentially given the right systems and structure.