Founders of franchise systems spend time, treasure and pain to get their system to the point that it has significant enterprise value. Many have a numerical goal for that value and a timeline for when they want to harvest their years of hard work. But when is the right time to sell? In my opinion, it’s a more complex analysis than just getting to the right number. Founders need to think deeply about what comes next, both personally and professionally, and should not be afraid to consider if their system is worth this much today, what could it be worth tomorrow, and what would it take to reach tomorrow’s value?
Franchise systems rarely grow in a linear way; they typically either shrink or grow exponentially. The strongest, most valuable systems grew a little at first while assembling all the puzzle pieces necessary to sustain future exponential growth. When they finally hit their stride and the royalty stream not only supports their operation but also generates a profit, founders often become tempted to enter a transaction. Conversations at franchise industry trade shows inevitably shift to the “crazy” multiples that private equity (PE) firms pay for emerging brands. But they keep doing it, so perhaps they’re crazy like a fox.
What I believe the PE firms have discovered is that founders perceive the future challenges of being a franchisor to be as hard, or even harder, than the path they took to reach their current position. This is where the “timing” issue truly comes into play. If that is true, then by all means, take the money and run, and let the future problems become the next owner’s issue. But what if the equation was reversed? What if the hard part is behind you and the road ahead isn’t quite as treacherous? Would you still exit at the offered price? Do they really know your business better than you, or do they know something you don’t?
At its core, franchising is an intellectual property licensing business. It takes years of trial and error to refine the intellectual property to the point where it can become somewhat self-sustaining. Consequently, “alternative” partial exit strategies, have emerged where founders retain ownership and control of their brand, but sell off some of their earnings to companies that specialize in purchasing recurring royalties. An exit should be executed intentionally, with a true understanding of the value of your royalty stream and when it makes the most sense to make a deal.
Tom Spadea
Tom Spadea is a franchise attorney and founding partner of Spadea Lignana, one of the nation’s premier franchise law firms, representing over 300 brands worldwide, from emerging concepts to elite brands that are household names. Spadea is a Certified Franchise Executive, speaker, author and key adviser to many high-level executives and entrepreneurs in franchising. spadealaw.com, tspadea@spadealaw.com