Franchises make an offer few can refuse

Franchising’s smooth selling tactics are making it harder for independent SMEs to attract buyers. By ANDREW KENT

By Andrew Kent

There are nearly 1000 franchisors and more than 60,000 existing franchise businesses in Australia. Most franchisors still have additional licenses and or territories available, and they are becoming increasingly sophisticated in how they are presenting them to potential franchisees.

While the total number of franchise businesses is still less than 10% of the number of businesses in Australia, when it comes to buying and selling businesses they are far more important than that.

First of all the volume of “new” franchises they have available is by some calculations potentially as big as those already in place.

Second, many of the existing franchise licenses are for a five year term, which means on average 20% of the existing franchisees are up for sale or renewal in any given year.

With the industry growing at around 10% a year, there are an estimated 10 to 20 thousand franchisee businesses seeking owners every year. These are being enthusiastically and professionally marketed by full-time professionals. The result is an increasingly compelling business package being presented to often first time business owners.

Compare this to your traditional family business (mum and dad) looking to put the business on the market as retirement beckons. According to recent research, most of them will not have planned for the sale.

The business structure, in particular the financial relationship between business and owners, will be designed to minimise tax rather than maximise sale value. They will have little understanding of what potential business owners are looking for.

Still, many will take on the sale of their business personally, just as they have taken on every other business issue before it. Innocently they put a price on their life’s work, add a descriptive sentence and a phone number and put an advertisement in the paper. It is chalk and cheese.

Business owners looking to sell their business need to give due respect to the business they have created as well as its potential new owner. Like the franchisors, they need to put together some supporting material outlining the potential future of the business and the new owner’s ability to determine its destiny.

They should prepare the business financials, and outline key strengths of the business, things like customer loyalty, and ongoing orders and contracts should also be given due attention.

It is also a good idea to get a professional adviser, such as accountant or business broker, to handle the inquiries and negotiations. Many existing businesses have a more compelling story and value proposition than some of the franchises on the market, but there is no doubt the franchisors have the edge in story telling at the moment.

Whether you are looking to buy or sell a business, it is a good idea to review some of the more detailed promotional literature for franchisee opportunities in your industry. It can provide a valuable perspective on the potential of the industry as well as providing some insight into what is appealing to potential business owners at the moment.

If private business owners do not change their ways, then we may continue to see the growth in the number of franchisee’s while an increasing number of private businesses are wound up unsold.

Andrew Kent is a director of BizExchange, an independent marketplace for business for sale or seeking investment.