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Franchises - What's The Exit Strategy?
At an International Franchising Symposium in London, Peter Holt
made the bold statement to his audience of Franchisors that they
needed to understand that their business would fail, and in fact
all businesses are bound for failure. Needless to say, there
were a few shocked faces in the crowd. He was making the point
that it really is just a matter of the number of calendar flips
before time strangles any business. It's a hard point to argue
when you think that the Neanderthal Fortune 100 included
Barney's Dinosaur Obedience School. Not a lot of money in that
these days.
Evolutionary change would seem to indicate that we should all
prepare for failure. Of course, if we do an extremely good job,
perhaps our grandchildren's grandchildren have the problem, and
we can rest easy in the hammock for now. In a much more
practical view of the calendars we get to flip ourselves, we
should think about creating a successful Franchise business,
maximizing the value, and realizing the optimum return with an
appropriate exit strategy.
The folly often lies in not considering this part of the
equation at the very time that you are considering entry into
the Franchise in the first place. That's exactly the time when
you need to give significant consideration to the value of the
asset that can be created. Ongoing profitability, cashflow, and
emotional fulfillment, are all important criteria in the process
of making an informed business decision about becoming a
Franchisee. But then so is the growth of the asset value you
create, along with the ease of realizing that value at the time
you intend to exit.
Snagglepuss always knew it was 'exit, stage left', but that is
not always so clear in the operation of a Franchised business.
What is clear is that some dedicated thought needs to be applied
at the time of entry so that appropriate strategic planning is
put in play. Let's consider a simple example to illustrate the
importance of this consideration where you can increase the
value of the business by $200,000 in five years, and there is a
ready and willing market for the business at the end of that
time. A straight-line application of the value increase, without
considering the time value of money, would indicate that the
real average annual earnings would be $40,000 over and above the
net income of the business.
That should tell you that a business that earns $80,000 per year
in profit might actually be a better investment than a business
that makes $100,000 per year, if the latter has significantly
less realizable value at the time of exit. If the plan is
succession to family members, then again, the value of the asset
to be transferred is of paramount importance, and not just the
annual income.
Of course the timing of exit or liquidation will carry
significant weight, and it's not always in our control.
Gilligan's partnership share of Skipper's Cruise Lines would
have been much more valuable before he met Thurston and Lovey.
That would indicate that we shouldn't put the hen's product all
in one wicker carry case. The consideration should include both
ongoing profitability, as well as ultimate asset value at the
planned time of exit.
The value of planning can't be overstated. The Allies didn't
just decide to go for a boat ride across the English Channel to
Normandy one sunny afternoon. The Miami Dolphins didn't win
three Super Bowls in a row in the 1970's because they won the
coin toss. They even withstood the infamous Garo Ypremian
foibles, because their plan was tight and well executed.
It certainly makes sense that a tight, and well executed,
business plan would include both the profitability of the
venture, and also the ultimate cash value at the end of the
rainbow. The Franchisor should be able to provide you with
pertinent information about asset growth, and the factors that
will affect transition. If they are unwilling to discuss the
matter, the solution is simple - run!
All good Franchisors should be looking for Franchisees that wish
to maximize the value of their business with a well laid out
plan. That will only enhance the value of the Franchise system
as a whole, which increases value for each individual
stakeholder. For the Franchisee, it really should be a
significant attraction to become involved in the business in the
first place.
The 21st century businessperson is the spawn of corporate
hijinks and technological advancements in today's global
marketplace. What mattered in the past is not important now,
including individual
employees, whole departments, and entire
processes. The new entrepreneur needs to control their own
destiny, and will not place their fate in the hands of others.
They will not risk Mr. Dithers handing them a pink slip. They
believe that assessable risk is required to earn financial
freedom. They also understand that the proper equation to assess
risk includes both current profitability plus long-term asset
creation.
Of course, there must also be emotional attachment to the
business at hand in order to optimize value. If the plan is to
grow the business to maximize value, and there is emotional
commitment to that plan, the results can be dramatic. How
important is emotional attachment? I've stayed in hundreds and
hundreds of hotels, and yet I've never seen anyone clean the
toilet in their room. There's simply no emotional attachment to
the asset. I've never seen anyone wash their rental car either.
Nurturing, prodding, improving, adjusting, and building, all
take commitment in order to be the creator of the ultimate value.
Like a baboon picking fleas, each business opportunity has to be
examined carefully. The asset value of some service-based
businesses will often hold value, and in fact increase in
redeemable value as each new client is added to the business.
The exit strategy of a retail location should include an
assessment of the initial investment required, real estate
values, competition, and demographic factors. The history of
increases in Franchise Fees should also be considered to predict
future minimum transfer value.
I experienced a good case in point about Franchise Fees. In
1972, a good friend and I decided that March break was best
spent at Daytona Beach, as all good first-year college students
conclude. We found this new restaurant there that had line-ups
around the block - literally. It was called McDonalds. When we
returned to campus, we went to the library to do some research
because we were told that McDonalds might entertain building one
more restaurant for the right person. The cost at the time was
$25,000. If we could have figured out how to raise the money, we
would have become partners in a McDonalds Franchise, and my bet
is we would have at least doubled our money.
Portability of transfer, able & willing marketplace, skills &
training required for entry into the business, and predicted
brand value at the time of anticipated transfer are all part of
the equation. Flexibility of the Franchisor to address new
market opportunities will create new markets for the Franchise.
In addition, expansion plans of the Franchisor need
consideration. Static doesn't cut it. A plan to continue to
bring in new and vibrant Franchisees well into the future will
increase brand value, and nurture the market for the product or
service of the Franchise system.
O.K., I didn't say it would be easy to assess. There's a lot to
think about. What I am saying is that it would be foolish to
avoid the issue. The timing of exit may be 10 years down the
road, or 15, or even 25, but at the very least, it should be
considered as a part of a long-term strategic plan. Daniel
Hudson Burnham said "Make no little plans; they have no magic to
stir men's blood." So plan. Plan to profit. Plan to nurture and
build. And plan to exit.
The factors listed above must be assessed and ranked in order of
importance before understanding the true value of the
anticipated business venture. The maintenance and growth of
asset value, as well as portability on transfer will ultimately
determine the real return on investment.
Even though Barney was on the bleeding edge when he invented the
dinosaur biscuit to reinforce good behavior, his target market
ultimately went with the cats and dogs option. Of course, there
wasn't a big market for VoIP and Blogs in that digitally
deprived age, when zeros and ones referred to the near death
experiences of that particular day. Oh yeah, and it wasn't that
long ago, when McDonald was an old farmer.
The real message is that Barney should have had a plan to find a
buyer before Rin Tin Tin and Sylvester showed up on his
neighbor's doorstep.
About the author:
Dennis Schooley is the Founder of Schooley Mitchell Telecom
Consultants, a Professional Services Franchise Company. He
writes for publication, as well as for
schooleymitchell.blogging.com and franchises.blogging.com, in
the subject areas of Franchising, and Technology for the Layman.
http://www.schooleymitchell.com, 888-311-6477,
dschooley@schooleymitchell.com.
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