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Are You Considering Selling Your Franchise Business?

Exit strategyThere comes a point in the life cycle of every franchise business when the current franchisee will require an exit strategy. A common issue amongst franchisees is that while they focus on managing and developing the business, they often do not invest sufficient time in planning their exit. The key to a successful resale is planning. It does not matter whether you are looking to sell next year or in 5 years time; a carefully planned resale strategy will maximise your return. 

Why is business planning so important?

Preparing a franchise business for resale, or “grooming” a business, is the essential process of making sure that the business is presented in as attractive a fashion as possible and that its full value is apparent to the prospective purchaser.  The process is all about giving the franchisee the best possible chance of selling their business for the best possible price. Owners of franchise businesses that sell for maximum value do not leave their exit strategy to luck. They know that the value of a business depends on maximising the factors that will appeal to a potential buyer.

How far in advance should I start planning?

Selling your franchise is probably one of the most important transactions you will ever undertake and it is therefore vital that you get it right. The more time you allow yourself, the better. Many franchisees find it can take at least a couple of years to prepare effectively.

Do I need to inform the franchisor?

The franchisor will usually include terms of exiting the business in the franchise agreement and careful exit planning will help you to maximise the value of the business when you come to sell. With any franchised business, the franchisor will have the ultimate say on whether the buyer is suitable to become a franchisee in their network and therefore they should be involved in the process at an early stage.  

You are free to find a suitable buyer yourself however the franchisor may also have a list of individuals who want to invest in the business and are waiting for a suitable territory. The new franchisee will have to meet the same criteria you did when you took up the franchise. In many cases the franchisor will charge a fee if they find a buyer themselves.

How can I increase the value of my franchise?

Your business will be more attractive if it shows strong, consistent financial performance over the past few years. It may be appropriate to modify your strategy to achieve this, focusing on short term results rather than long term investment plans.  

There may also be some flexibility in the way you present your financial accounts, such as minimising any provisions for old stock and where possible, reducing your overheads. A buyer will expect to see a steady increase in turnover. The business is also often more attractive if it is not wholly reliant on a major customer or employee (including yourself). Low staff turnover can also be attractive to a purchaser as it indicates a contented workforce.

What do I need to do to prepare my business for resale?

Aim to present potential purchasers with as ‘tidy’ a business as possible. When you are ready to put your franchise business up for sale a prospectus for sale will need to be prepared. This can be drawn up by a sales agent or broker and usually includes:

  • A description of your franchise
  • Your sales and adjusted profit history
  • Copies of 3 years accounts and up to date management accounts
  • Details of any equipment owned/leased
  • Written documentation for all key contractual relationships e.g with employees and possibly certain customers or suppliers e.g landlords, lease companies
  • Details of price

How do I value my franchise business?

Most resales are valued by their ability to generate maintainable earnings/profit. Maintainable earnings is the recurring profit which the potential franchisee can reasonably expect to continue to make. The actual earnings that a business has achieved in the immediate past are commonly taken as a guide. 

These earnings are normally adjusted to exclude any interest payments, depreciation or any tax payable. An average for the last three years with a weighting towards the latest results, is normally calculated to which a multiple is applied to arrive at an asking price. Typical multiples range from 1.5 times to 5 times depending on the industry sector.

Should I sell assets or shares?

If you are planning to sell your franchise business and are a sole trader or a partnership then an asset sale is your only route. However, if you run your business through a limited company then your first sale decision is the choice about whether to sell the assets of the company or your shares in the company. In a share sale, you sell the shares in your ‘trading’ company. The ownership of the company changes, but the trading business stays exactly as it was before the sale.  

The employees, contracts, properties etc will remain in the company’s ownership. In an asset sale, the trading business is transferred from either you as a sole trader or your company as “goodwill” and any other assets in the business such as equipment, stock etc. 

Asset sales tend to be less tax efficient for sellers as there is a potential double tax charge involved; the selling company may be taxed on the sale of the assets and then you as a shareholder of the company may be taxed on any distribution or extraction of the sale proceeds from the company. On a share sale only the sale of the shares is subject to tax.

What can I do to minimise any tax liability?

The tax position on selling a business can be extremely complicated. You may need to consider the tax consequences for the company, for you personally, and for the purchaser. Taxes involved could include corporation tax for a company and capital gains tax personally, stamp duty on any sale of shares, stamp duty land tax on the sale of any business premises and income tax. You will also want to ensure that you qualify for ‘entrepreneurs relief’.

Consideration of inheritance tax planning at the same time would also be advised. The best option will depend on the circumstances, and the most tax-efficient strategy may take some time to identify and implement. How Can We Help? For many, the sale of their franchise business is the culmination of a lifetime’s work. Often, this will be a once in a lifetime transaction—with just one opportunity to get it right. Establishing an exit strategy can start at any time, but the sooner the better.

We can assist in assessing the current position of the business, developing an exit strategy and guiding you through the exit options. We can also prepare a valuation of your business. If you want to maximise your net proceeds it is vital that you consult with us about the timing of a sale, and the reliefs and exemptions which you might be entitled to claim. 

Desirie Lea is the director responsible for the Morris & Co franchise department. Morris & Co are BFA affiliate members. Morris & Co provide accounting and tax solutions to franchisors and franchisees based throughout the UK. Morris & Co are also actively involved in the provision of training seminars on behalf of the BFA.