How Franchising Affects Your Exit Plan
Being a franchised company may have some pros and cons when it comes time to sell
Joining a franchise can offer short- and long-term benefits for the right HVAC companies. For those interested in franchising, one common question that arises is, “How will franchising impact a prospective sale or exit?”
Joe Bazzano, a principal with Beacon Exit Planning LLC, said, from a valuation perspective, cash flow and profitability of a business are of the utmost importance. And, to that end, being a franchisee may be a plus.
“The first place to look at is profitability,” he said. “If the franchised company is profitable, and the franchisor is profitable, that’s going to provide some additional benefit to a potential buyer.”
According to Bazzano, benefits of buying a franchised business include predictability of operations, market research, and — to some extent — the marketing clout of a national brand.
“Generally speaking, franchised businesses are often supported by market data and research,” he said. “Franchises also tend to offer better predictability because of their standardized operations, policies, and procedures. That’s a big help from a valuation standpoint and from a buyer’s perspective predictability of operations means less risk.”
One area in which there is not much difference is taxation. According to Bazzano, the same fundamental tax laws apply whether you’re selling or buying a franchise or an independent company.
The marketing clout is a double-edged sword, however.
“Franchises give you a national name and advertising, branding, and marketing support,” said Bazzano. “But, at the same time, your marketing may be limited to what the franchise outlines and provides for you,” Bazzano said.
Every franchise is different, Bazzano concluded. Some allow the franchisee to sell on the open market, while others may require the company is sold back to the franchisor. For those that may be sold on the open market, there is value to the structure of a franchised business.
“Keep in mind, when you’re selling a business, it’s all about who the buyer is,” Bazzano said. “Some buyers may not want to be tied to a franchise agreement, whereas others might like to come into a turnkey operation. They may want a business with all the policies and procedures in place. Those types of buyers are likely to find a franchised business very attractive.”
PLUSES AND MINUSES
Fred Silberstein, president of SF&P Advisors, a business valuation firm specializing in the HVAC industry, believes being a franchisee may impact the value of a business when the time comes to exit.
“Being a franchisee limits your potential buyers,” Silberstein said. “From what I have seen, the franchisor generally has a right of first refusal or approval of the new owner who is taking over the franchisee’s business. That definitely limits your options.”
Silberstein added that, in his 18 years in business, he has never been approached by a buyer who was specifically targeting a franchised business for acquisition.
“If someone wanted that franchised business, they would probably have to work directly with the franchisor. They would then most likely have to buy into the franchise rather than turn the business into an independent operation.”
Silberstein advised an “eyes wide open” strategy when it comes to all aspects of joining a franchise, but especially when it comes to exiting.
“Clearly the situation will be dependent on the individual franchise agreement,” he told The NEWS. “I would advise potential owners to make sure they review the franchise agreement with their legal counsels. There are benefits to getting into a franchise, but be sure to understand the agreement you’re signing.”
REVENUE GENERATION IS KEY
The view from the trenches when acquiring any company is fairly straightforward, according to Rich Biava, vice president and co-owner of GAC Services, an HVAC and electrical contractor in Gaithersburg, Maryland. Biava has completed four acquisitions for GAC Services.
“There are people who do very well as independent operators, and there are people who do very well as franchisees,” Biava said. “But, at the end of the day, you value a business based on its assets and ability to generate revenue and net income over the next five years.”
Given that, Biava said he doesn’t think a buyer would be giving up much by buying into the organization and structure of a franchise.
“Being a franchisee might limit the number of people who find your business attractive,” Biava said. “However, those who are interested will likely appreciate the processes that are in place, because those are going to help sustain the business.”
Biava noted he personally would not be interested in purchasing a franchised business because he and his partner support each other in many of the ways a franchisor supports its franchisees. However, someone who is on his or her own and may have a great technical background but a lack of marketing and human resources skills may find a franchise to be a very good fit.
Ultimately, Biava noted, HVAC companies must view their decisions to join a franchise as a partnership. It will have a profound effect on their business, their lives, and, eventually, their exits — just as entering into a partnership with another individual does for many independent businesses. In either case the terms of the agreement are of the utmost importance.
Publication date: 11/21/2016