Selling a franchise can be a complex and challenging process, requiring careful planning and professional guidance. StacheCow spoke with Jessica Fialkovich, founder and president of Exit Factor, to explore key aspects of determining fair market value, tips for avoiding common mistakes and guidance on attracting potential buyers. These valuable insights will help you navigate the sale process successfully and maximize your return on investment.

StacheCow: How can a franchise owner determine the fair market value of their franchise?

Jessica Fialkovich: I think the best way to determine the fair market value is to have an opinion of value or evaluation done on your business and, depending on if you work with a business broker or an exit planner like myself, it can be a few hundred to a few thousand dollars, but it gives you so much information. It can empower you to understand the true value of your company — and not just current value of your company, but also how to achieve a goal sale price. Say the company’s worth $500,000 today — that might not be good news for a franchise owner, but if you have done what we call an exit assessment, and you want to sell it for a million dollars, the information in the report can tell you the metrics you need to hit to achieve that goal.

There are obviously online resources and free calculators that you can access, but all of those calculators and free resources only provide generic data, using the same formula for every size business and every type of industry. The result is highly inaccurate at best.

StacheCow: What common mistakes do franchise owners make when selling their franchise, and how can they be avoided?

Fialkovich: The number one mistake franchise owners make is waiting too long to prepare to sell. The actual sale process, when you put your business on the market, find a buyer and close the deal, takes about a year.

Prior to that, you need to go through the valuation process. The value of a business isn’t determined just by one year of performance; it’s typically determined by the average of the last three-to-five years of the company. If you want to maximize what you can sell your franchise for, you can’t just have one rock star year. You’ve got to have three-to-five highly profitable years. This will boost your valuation.

What I see a lot of franchise owners do is wait until they’re done — they’re ready to retire, they’re burned out, they’ve got other opportunities and they think they can simply list the franchise for sale. At that point, it’s too late for them to really maximize the value. They really need to start the planning process three years in advance at a minimum.

Another mistake I see from franchisees is not engaging the franchisor. When you are part of a franchise system, your franchisor is going to have to approve your buyer. That’s a requirement for almost every franchise, so you need to engage them, and they actually might have buyers for your business, especially if you’re in a well established brand where a lot of the territories and locations have been sold out. They could have a wait list of people looking to open your brand in your market. Sometimes that can be a much easier process than going to market with a broker.

StacheCow: How important is it to have professional assistance during the selling process?

Fialkovich: Most business owners are going to sell one business in their lifetime. One of the things I like to say a lot is that life is too short to make all the mistakes ourselves. If there are professionals available — and usually we recommend three different professionals in the process — you should use them. Leading up to the sale, you want to engage an exit planner and exit strategist. That’s what we do at Exit Factor. They help with the pre-planning part, including the valuation. The second person you want on your team is an attorney. This is definitely, by far, the most important person to have. You need somebody that can write the legal documents. The third person you’re going to have on your team is a business broker.

These are people who do thousands of deals throughout their career; in any given year they may be working on 10 to 200 business sales. There are people that specialize in the franchise industry, too. They’ve already made all the mistakes and learned from them. Not only can it save you thousands of dollars in the deal process, but it can reduce your liability for post sale litigation. It can help remove any messiness between your franchisor and you.

StacheCow: What strategies can a franchise owner use to attract the best potential buyers and ensure a smooth sale?

Fialkovich: There are some things you can do in your business. The first thing you can do is maximize profitability. If we think about somebody who’s buying a business, they’re an investor. They’re going to invest in a business, and they want a return on their investment in the form of profit. The more profitability you have in your company, the more buyers you’re going to attract. Buyers just simply want companies that make more money. You can also benchmark your profit margins against your competitors, and if your profit margins are higher than your competitors or are higher than the industry standard, you are a better investment than another company so that will attract our buyers.

The second thing you can do, from an operational standpoint, is ease the transition. You do this by getting everything out of your head as an owner and documenting it, or delegating it to your team, because when you transition out of the business you want people to be working for and doing business with the company, not with you.

The last thing you can do is position the company for growth. Nobody invests in an investment and wants it to stay stagnant. They always want it to grow, so your company needs to be fundamentally sound and positioned for the next level of growth.

StacheCow: Any other thoughts or advice? 

Fialkovich: Don’t forget the importance of confidentiality while you’re going through this process. As I said, it’s a three to five year process, and you don’t want anybody – employees or customers – to know you’re going through this exit planning process, because it can destroy the company. Customers and employees may be fearful of a change of ownership, so they may leave.