Sell Your Franchise Business - The Ultimate Guide – Raincatcher (2024)

The franchise industry has always been a hub of ingenuity and unwavering commitment to enhancing opportunities. As the years have progressed, the franchise landscape has transformed due to technological strides and worldwide advancement. In this modern franchise era, pursuing excellence has never held more importance.

If you’re contemplating the sale of your franchise business, trust Raincatcher as your partner. Renowned as a leader in franchise M&A, we’ve garnered acclaim as the #1 business broker, as per Inc. magazine. Like any significant endeavor, divesting a franchise business requires devoted time and energy to attract the perfect buyers. While there’s no one-size-fits-all approach to the sales process within the franchise industry, we tailor our methods to ensure the most favorable outcome for your business. We start with gathering all the necessary records to the final closing stages.

If you have decided to sell all (or part) of your healthcare company, here is a glimpse at what the process will entail over the coming year:

• Build a strong deal team:Align yourself with a business brokerage firm (for deals under $10m) or M&A firm (for deals over $10m) that has proven success representing healthcare companies. Find a proven M&A attorney (we can introduce you to several groups we’ve succeeded with), and a tax attorney.
• Compile your materials:Your M&A advisor (Raincatcher) will request a litany of documents from you. This includes financial statements, organization charts, supplier and customer contracts, employment agreements, etc.
• Market the deal:We create an expansive document and financial forecast for your company and then bring it to market. Most of this work falls on our shoulders as we have an expansive database of investors for companies of all industries.
• Receive IOIs:Depending on the size of your deal, your advisor may suggest that you market the deal and push for LOIs. Or, if your business is large enough, we look to secure IOIs ahead of time so that we can shortlist the most capable buyers and present them with more information and meetings before receiving an LOI.
• Management Meetings: Should it fit your business, your broker will join you in hosting investors for a week to share additional information about your manufacturing company.
• Receive LOIs: ‘best and final’ bids will be received after hosting the most capable buyers for meetings.
• Sign an Exclusive LOI:After some negotiation, we help you select the most capable buyer based on their price, terms, likelihood of closing and plans for the company.
• Due Diligence: The buyer and their advisors kick off another 60-90 days of thorough investigation, leaving no stone unturned in examining every aspect of your company.
• Close: Closing time. The deal is done, and you’ll typically get 80% – 90% of the payment for your business now.
• Transition:After closing, the buyer will typically require the sellers to stay behind and assist in transitioning the business to them for an agreed-upon period of time.

Lower middle market franchise businesses (sub $15m EBITDA) trade across a fairly large range, depending on how desirable they are. A franchise company that trades for a high multiple (~10x) has many of these traits:

1. Brand Recognition and Reputation: The strength and recognition of the franchise brand within its industry and among consumers play a significant role in valuation.
2. Financial Performance: Historical and projected financial data, including revenue, profit margins, and growth rates, heavily influence valuation.
3. Location and Market Demand: The franchise’s geographic location and the demand for its products/services in that area impact its value.
4. Franchise Agreement Terms: The terms of the franchise agreement, including royalties, fees, and support provided by the franchisor, affect the business’s value.
5. Operational Efficiency: Efficient and streamlined operations, including cost control and effective management, contribute positively to valuation.
6. Competitive Landscape: The level of competition within the franchise’s market can influence its value, especially if it has a unique selling proposition.
7. Customer Base and Loyalty: The customer base’s size, loyalty, and engagement can indicate the franchise’s potential for sustained revenue.
8. Intellectual Property and Assets: Ownership of proprietary technology, patents, trademarks, and other intellectual property can enhance valuation.
9. Scalability and Growth Potential: The potential for expansion into new markets and the scalability of the franchise concept can impact valuation.
10. Industry Trends and Outlook: The overall trends and outlook of the industry in which the franchise operates can influence its perceived value.
11. Risk Factors: Any operational, legal, regulatory, or market-related risks associated with the franchise business may reduce its valuation.
12. Market Multiples: Comparable sales data from similar franchise businesses can be used to determine valuation multiples.
13. Owner’s Role and Management Team: The extent to which the owner’s involvement is necessary and the quality of the management team can affect valuation.
14. Customer Reviews and Satisfaction: Positive customer reviews and high levels of customer satisfaction can contribute positively to the business’s value.
15. Recurring Revenue Streams: The presence of subscription models, memberships, or other forms of recurring revenue can enhance valuation.

Remember that the exact weight of each factor may vary depending on the specific franchise and market conditions. Valuing a franchise business is a complex process that often requires the expertise of financial professionals and business valuation experts. Raincatcher has a dedicated franchise expert to support you in selling your business.

However, the fewer criteria your franchise company meets, the lower the multiple will slide. Although rare, some franchise companies don’t sell at all. However, these are typically small companies (less than $500k profit).

The historical and projected financial performance of your franchise business is a critical determinant of its valuation. Prospective investors will require access to updated accounting records, financial statements, and documents such as tax returns. These records will be scrutinized to assess elements like revenue, profitability, cash flow, and growth patterns, all of which contribute to evaluating the financial strength and potential returns on investment of the business in the franchise industry.

In the franchises industry, the size of the business often correlates with its valuation. For instance, a franchise business generating $500k in annual profit might command a valuation multiple that is lower compared to a similar business generating $3m in annual revenue.

Investment groups place great importance on maintaining a margin surpassing 20%. Franchise companies with healthy profit margins signify that the business possesses a competitive advantage and stands apart from its peers within the industry. This differentiation indicates a strong position and unique qualities that set the franchise business apart from competitors.

The industry and market conditions in which the franchise business operates play a crucial role in its valuation. Factors such as market demand, competitive landscape, barriers to entry, and industry growth potential impact the business’s perceived value.

Generally speaking, the more niche a franchise industry is, its total addressable market is smaller. However, they likely have few competitors in that niche and can therefore have more repeat business and more durable earnings. Investors will have different views on niche markets, with most buyers liking them and others disliking them for their limited growth prospects.

Buyers evaluate the growth potential of a franchise business to ascertain its worth. Aspects such as product or service portfolio diversification, avenues for expansion, market reach improvement, innovation capacities, and customer base all play a pivotal role in gauging the business’s future growth possibilities and subsequent influence on its valuation.

Even within the franchise sector, the specialized business we previously mentioned could exhibit promising growth potential by identifying related franchise domains to venture into and products/services that they can provide.

The tangible and intangible assets of the franchise business can also impact the company’s valuation. This includes franchise equipment, signage, real estate, furniture and fixtures, technology systems, customer records and data, and proprietary business methods. Well-maintained assets and valuable intellectual property can enhance the business’s value.

Generally, franchises with modern facilities using high-quality equipment and distinct branding will trade at higher multiples than those with more standard offerings.

Additionally, franchises with solid teams are seen as more desirable and able to transfer leadership over to a new owner. While this asset doesn’t go on the balance sheet, employees are critical to the business’s success.

While it might not suit every franchisee, most entrepreneurs we collaborate with in the franchise industry will discover that engaging in a well-organized auction process can yield the most competitive pricing and terms for their business.

Typically, auction processes in this sector require approximately 7-12 months for completion, depending on the specific circ*mstances. In most instances, we will advise our clients to enlist the services of an accounting firm to conduct a thorough quality of earnings analysis before initiating the auction process. Based on our extensive experience, we have found that the investment in terms of both cost and time is justifiable and often results in exit values that are 5% to 15% higher.

Additionally, it’s crucial to be well-prepared, have realistic expectations, and understand the legal and financial implications of selling a franchise business.

Now, let’s delve into an overview of the key steps involved in an auction process for franchises:

Sell-side due diligence

Specially designed brokerage or M&A auction process

Short-listing finalists

Negotiate LOI terms and facilitate diligence

Talk to the experts

Care to learn more about Raincatcher’s brokerage and M&A processes and what we can do for your business? Get in touch with us for a complimentary consultation.

A combination of factors influences investor interest in the franchise industry. Economic stability and growth play a significant role, with strong economic conditions fostering increased demand for franchise services and products. Market saturation is another crucial consideration, with highly competitive markets potentially discouraging potential franchisees while underserved areas may present growth opportunities. Technological advancements and innovation can influence the types of franchises in demand, and regulatory changes can substantially impact the industry.

Additionally, franchise brand reputation, access to financing, and market research are vital factors that shape the market’s appetite for franchise opportunities. Ultimately, the franchise industry’s attractiveness to investors and potential franchisees is shaped by a complex interplay of these factors and prevailing economic conditions.

Thinking About Selling?

If you are entertaining selling your company, feel free to request a consultation with one of our franchise business brokers or M&A specialists to learn about our unique process and why we believe it is the best in the industry.

In today’s thriving franchise industry, strategic buyers and private equity groups constantly seek investment opportunities that promise substantial returns. Their primary goal is to acquire companies that offer them the potential to generate robust cash flows over the next decade, often at a discounted price. Here’s how they achieve this:

1. Investing in Growth: Many investors target companies with significant growth potential. By injecting capital into such businesses, they aim to accelerate expansion, capitalize on emerging markets, and tap into untapped revenue streams. This strategic approach not only increases the company’s value but also enhances its attractiveness to potential buyers.
2. Acquiring Differentiated Companies: Another favored strategy is acquiring companies that possess unique differentiators. These businesses typically boast a stable and predictable client base, resulting in a steady cash flow. Such stability is a crucial driver for investors, as it reduces risk and enhances the prospects of a strong return on investment.

In both these scenarios, the importance of having a state-of-the-art facility equipped with cutting-edge technology and modern equipment cannot be overstated. This modernization serves a dual purpose:

• Driving Growth: Investors often view technology and advanced equipment as tools to fuel business growth. Whether through process optimization, enhanced product/service offerings, or increased operational efficiency, technology can be leveraged to significantly expand the company’s market share and revenue streams.
• Competitive Edge: Modern facilities and advanced technology differentiate a business from its competitors. This competitive advantage can result in higher profit margins and a more resilient, consistent revenue stream. Investors recognize the appeal of such attributes when evaluating potential acquisitions.

Furthermore, companies offering specialized services tend to command premium valuations. These specialized businesses often trade at 30%-40% higher prices than their more commoditized counterparts. This premium is due to their unique expertise, which can be difficult for competitors to replicate.

At Raincatcher we represent sellers of exceptional lower middle-market companies. Generally speaking, these companies generate anywhere from $2m – $100m in annual revenue. We were even named the #1 business broker by Inc. magazine.

Our team is comprised of former business owners, public accountants and investment bankers. Included in this group is two of our partners who each spent over a decade working at middle-market investment banks where they represented manufacturing companies. This is one of the reasons we are seen as an expert in the manufacturing space.

request a consultation today to review your market value, discuss what type of exit process would make the most sense and meet our team of advisors who have real-world experience selling manufacturing companies.