Selling a Franchise: Reasons to Cash Out | Franchise Secrets

Selling a Franchise: Reasons to Cash Out

Every business I’ve owned has been part of a journey. Part of that journey is knowing that it is time to sell that business. Today we are sharing part two of a two-part series about selling your business. If you didn’t read part one from last week you can find it here. Last week we looked at how to remove yourself from the business as a method to increase your multiple when you sell. Today we will examine the many reasons why someone would sell a business and ways to approach those sales with the greatest success.

One of the primary reasons to sell your business is simply to 𝗰𝗮𝘀𝗵 𝗼𝘂𝘁. Having cash flow is essential if you want to build a bigger empire of franchises. On average the businesses I’ve sold have netted me about four times my yearly cash flow from that business. So, for example, if a business is making $100,000 a year, I’ve sold it for $400,000.

So, with the sale you have four times the amount of cash as you could earn in a year on that business. Now, what I like to do is try to start new businesses more often, trying to sell businesses every year. If you are able to take a three-year-old business and sell it for four times EBITDA or cash flow and follow that model for ten years, then you’ve made 𝟰𝟬 𝘁𝗶𝗺𝗲𝘀 the amount you would make from just the yearly earnings from those businesses. I focus on getting into businesses that I know I can turn around and sell.

If you want to do this, of course, you will have tax consequences. You have to pay taxes on those sales, and it is something you really need to consider in the process of deciding to sell. 𝙔𝙤𝙪 𝙣𝙚𝙚𝙙 𝙩𝙤 𝙥𝙡𝙖𝙣 𝙛𝙤𝙧 𝙞𝙩. But one way to mitigate your tax burden is to always be starting new businesses while you are selling your other business. If I’m taking that $400,000 which I made on a sale and investing that into a new business I can mitigate some of that tax burden. Now, it does depend of the type of business and you need to be strategic about it. You need to plan it and have a good CPA. But this strategy of buying, building, selling and repeating that year after year can really help with mitigating the taxes when you are selling.

Usually selling for cashflow is one of the best reasons you can sell your business. In those situations, you are usually not a desperate seller and can wait to get what you want. It is the same for the buyer. They aren’t desperate either and are probably looking to buy that business for a strategic reason. Maybe they want to own the whole market or maybe they are in growth mode and investing in personnel and infrastructure or technology as a growth strategy. So, in those situations you are really able to do well with a sale because no one is desperate.

Another reason you may be thinking of selling your business is risk mitigation and wanting to diversify your business profile. You may find that you want to broaden the types of brands you are holding and expand your influence and experience. That can involve investing in new geographical regions or even be related to wanting to expand into a new partnership with other investors.

Those are both primarily positive and proactive sales options. Not all business works out the way we want it to though. It hasn’t been perfect for me either. Sometimes there are negative pressures that are putting you in the position of wanting or needing to sell your business.

There are so many reasons that could be contributing to the desire to sell. Maybe you realize the franchisor wanted more work from you than you originally thought. If you got into the business wanting semi-absentee ownership and now you are being asked to be involved in a lot of the day-to-day; that can be difficult. You may want to sell that business and find a brand that suits the kind of ownership you are really looking for.

If you know your time and money can be put to better use in another brand, then selling is a really good decision. There may be an opportunity to find another franchisee who is in growth mode, and arrange a sale with them, that gets you out of the business so you can use your strengths and time in a way that serves you better.

And it is really important to remember that a lifestyle focus is why many of us got into this business anyhow. If you are just burned out and not enjoying the business anymore than selling is the solution in a lot of cases. If your life circumstances change and you are running the business and it is just a huge burden. You are thinking back on when you did the 9-5 and wishing you could be back in that job. If that is your situation then you may just need to get out. It’s important to realize that early in the process too.

I’m a big fan of toughing it out when you can. 𝗧𝗵𝗲𝗿𝗲 𝗶𝘀 𝗱𝗲𝗳𝗶𝗻𝗶𝘁𝗲𝗹𝘆 𝗮 𝘃𝗮𝗹𝘂𝗲 𝗼𝗳 𝘀𝘁𝗶𝗰𝗸𝗶𝗻𝗴 𝗶𝘁 𝗼𝘂𝘁. But if you really find you are not happy, and you can’t see a path to joy while you are the owner of that business then you need to be very honest and just sell the business.

It’s at this point in the process that people can start to get the wrong focus. In this case the seller may not be desperate, but they are quite motivated. When they are asked how much they want for their business the price is often really, really high. As a buyer I know from experience that if I wait it out six months or a year then the price will probably come down. That is usually a price which is very interesting to me as a buyer.

But unfortunately, some people hold out for a really high price when their heart isn’t in it anymore. That’s a problem because now they are probably making poor decisions because they are feeling stress and the revenue is going down and a business that was worth X amount is losing profitability. If there is stress and fear and discouragement then it is really important to be honest with yourself and consider the buyer’s perspective. You have to start looking for real buyers who valuate the business more realistically.

That buyer is probably another franchisee who is right next to you. It is someone who is looking to expand. Ideally you already have a network and relationships with other franchisees. It is important to know who the players are and to know something about their plans. You don’t want to be in a crisis or a fire sale situation. Instead you want to have a real clear picture of the landscape for your brand, some of the key players and an understanding of the mindset of a buyer.

Keep in mind that there are a lot of valuation methods out there that are very matter of fact: all businesses are worth three times earnings, or four times earnings. That isn’t actually that helpful. The reality of business valuation is connected to the type of industry. For example, some industries have requirements that owners are highly active. Those are going to have a lower multiple than a business that has a less active owner. In fact, the higher multiples are typically the businesses with the less active owners.

The final alternative we have is related to not actually selling the business but a sort of middle ground. You can get equity out of the business but continue to own it. So, if you aren’t able to sell the business you can at least get in an ownership position which is more enjoyable to you. If you realized, you don’t want to do the kind of work necessary to keep the business running you can find an operational manager. You want to begin looking for a person who will love the challenge of managing the business. You are looking for someone who will have fun with the operational details that don’t interest you.

This really has to be someone you can trust. It must be someone who you support and who understands your purpose without a ton of day to day direction. They should have skills that are different than you and be someone who really wants to learn new things. You are supporting and empowering them to have real equity in the company. So even if you can’t sell that business right now you can at least get in a position to focus on the things that are most interesting to you. You really don’t want to be stuck in a business doing all the work if you aren’t finding joy in it. Instead you can reach out and build a team of people who will love doing that side of things.

It’s the realization that it’s really not about how much money you are making. You have to get to the point where you are satisfied. That may be selling the business, but it may be building that team of people who you can teach and train. Every person who owns a business has their personal values and goals. 𝗙𝗶𝗻𝗱𝗶𝗻𝗴 𝗮 𝗯𝘂𝘀𝗶𝗻𝗲𝘀𝘀 𝗽𝗮𝘁𝗵 𝘁𝗵𝗮𝘁 𝗳𝗮𝗰𝗶𝗹𝗶𝘁𝗮𝘁𝗲𝘀 𝘁𝗵𝗮𝘁 𝗶𝘀 𝗵𝗼𝘄 𝘄𝗲 𝗿𝗲𝗮𝗹𝗹𝘆 𝗳𝗶𝗻𝗱 𝘀𝘂𝗰𝗰𝗲𝘀𝘀.

So, I hope that gives you a good overview of some of your options and opportunities if you are thinking about selling your franchise. There are no “bad reasons” to sell if that is what makes sense for you. But it is most important that you know who you are as a business owner. You want to sell knowing it supports the ideals and values that got you into business in the first place.