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by Diana Capirano
Certified Franchise Consultant
When exploring a resale, the level of due diligence will be driven by the complexity of the business model and how the owner is performing. Evaluation of resales must be comprehensive, even granular to mitigate risk. Although franchise systems are the same, owners are not, which leads to a great degree of variability in financial and operational performance.
A holistic approach is best in assessing the overall health of the business. Many buyers think they just need to evaluate financials. Not so! If you’re not prepared to ask the how and why behind the numbers, you may miss a whole lot more.
Following are the 3 most important categories and items that are fundamental in disclosure.
Financial
Standard disclosure is the past three years’ tax returns and corresponding profit-and-loss statements (P&Ls) and balance sheets. Also request current YTD (Year-to-Date) information. Tax returns tend to be of most value because they are holistic. Make sure the financials are verifiable or reviewed by a CPA as they are not audited. In some cases, a cash-flow analysis may be available. If not, view bank statements to verify money in and money out.
Operational
Leases, organizational charts, contracts, price lists, payroll, staff records, third-party companies utilized, and a review of SOP are just a few on my checklist. The more complex the business model, the more items you can expect to dig into.
Compliance/Legal
You’ll need to verify the business license(s), insurance policies, lawsuits/claims, liens, and other licensures (if required). Even if not planning a stock sale, any litigation is important as it can speak to the reputation of the brand name or future financial vulnerabilities. Businesses related to health and the trades tend to have more regulations. Make sure you check federal, state, and local requirements to operate this business. Verify that the existing business has been complying and is in good standing through past surveys or copies of licenses.
Opportunity Value
This is more about you than the seller. It’s how you can improve the top and bottom lines. Financials are a great indication of how the current owner is operating but not how you will run business. For example, if the seller has been in business for two to four years and revenue is declining rather than growing—why? This is a prime time for a great growth trajectory. For an owner after 10-plus years, declining sales may indicate burnout, not utilizing new or updated franchise processes, or in some cases, the competitive landscape changed and the owner did not adapt. Good data does not lie, and intangibles are harder to value but just as valuable!
Don’t be afraid if your due diligence doesn’t reveal great results. They may serve you well as leverage in negotiating. The nightmare would be not knowing the real deal and entering blindly into a sale.
Diana Capirano, CFC, has an expansive career which includes corporate and franchise sales and development, marketing and operations, merger and acquisitions, structuring and negotiations as well as business ownership. As a highly-respected consultant and mentor, Diana espouses a profound commitment to help prospective business owners and investors understand and navigate the process of deciding on a franchise business. Contact Diana at 941-999-0095, email diana@focusfranchise.com, or visit http://www.focusfranchise.com.
As a specialist in franchise resales, I’ll go on record saying that you’re as likely to find a flawless resale as hit a mega-lotto jackpot. But people continue to search for the diamond in the rough. “I’m looking for a business with a motivated seller, with low investment/high return, excellent cash flow (mid-six digits), and seller financing.” Sound familiar? Newsflash: EVERYONE is looking for the same thing. Lightheartedly I respond, “Wow! That sounds great. I’ll take 10!”
Many resales fall into the distressed category, something like buying a house with good bones but needing work and TLC. Premium resales may never even hit the open market because they sell internally (within the franchise system) or to personal/professional referral networks. Most great resales that hit the web portals come and go very quickly.
Some business seekers who concentrate only on existing entities can search web portals as a full-time job for years, logging countless hours, only to get beat out and then feel beat up. I’m not saying this to discourage you from looking for resales, but to caution you to be realistic and consider using a reputable resale consultant who can inventively search for them and then help navigate and vet the opportunities (Part 2 of this article in next month’s issue).
Both resale and start-up franchises require you to undertake thorough due diligence, investment of time and financial capital, and full-on commitment. Following the franchise training and systems will be necessary in both cases, but may be even more important in a resale because the previous owner might have strayed from the proven process.
Diana Capirano, CFC, has an expansive career that includes corporate and franchise sales and development, marketing and operations, mergers and acquisitions, structuring and negotiations, and business ownership. As a highly respected consultant and mentor, Diana espouses a profound commitment to help prospective business owners and investors understand and navigate the process of deciding on a franchise business. Contact Diana at 941- 999-0095, email diana@focusfranchise.com, or visit www.focusfranchise.com.