Multi-Unit Franchisee Magazine Issue III, 2013 | Page 80

ExitStrategies
By Dean Zuccarello

Are You Truly a Seller?
The market is ready—are you?

Y

ou’ve heard it before, and have
likely seen it firsthand in the
market: interest rates are at
historic lows, franchisee consolidations and refranchisings are prevalent, lenders are hungry, pent-up equity
is available and waiting to be deployed,
and deal activity is high. You might be
contemplating taking advantage of this
environment. But are you truly a seller?
To help you make that determination,
let’s address some critical considerations.
Timing
While the market factors may be aligned
to create an opportune time to sell, a more
important consideration is where you are
in your entrepreneurial life cycle. If you
have been contemplating retirement,
getting into a different business, or some
other major life change, the timing may
well be right for you to sell. But if you
are merely being seduced by the market
and do not have a solid strategic reason
for selling, this path will likely lead to a
failed transaction. To consummate a successful sale, first be sure a sale is right for
you—then determine if it is a favorable
time for you to sell.
Valuation and expectations
If you have determined that a sale is
right for you strategically, it is critical
that you get an accurate market valuation
of your company. You may have heard
about a price an acquaintance or fellow
franchisee received on the sale of their
business, and attempted to apply that to
your business. But typically there is not
enough information available to make an
accurate assessment.
For example, was it based on store
EBITDA or corporate EBITDA? Pre–
G&A or post–G&A? Were there Capex
requirements? Without knowing this,
that information is more rumor than data,
and notoriously inaccurate. There is no

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Multi-Unit Franchisee Is s ue III, 2013

substitute for using a competent industry professional to determine the value
of your business.
In terms of expectations, don’t make
the mistake of expecting an unrealistic
valuation for your company. Listen
to your advisor—who is on your side
and holds your best interests first and
foremost. The market understands that
operators take great pride in their com-

Don’t make
the mistake of
expecting an
unrealistic valuation
for your company.
Listen to your
advisor—who is on
your side.
panies, and that it took sacrifices and
hard work to build them. The market
takes this into account in determining what a business is worth. The deal
market may be quite active, but that
does not mean sellers can command an
unreasonable premium for their business. Unrealistic expectations will likely
ensure that no transaction takes place.
Buyer’s perspective
One excellent way to check the validity of
the valuation of your business is to take
a buyer’s perspective. Would you pay the
asking price for your business? What kind
of return would that yield? How much
equity would you have to contribute?
What leverage constraints are imposed
by available financing?
Approximately 95 percent of transactions involve lender financing. A buyer’s

lender will run leverage calculations, such
as lease-adjusted leverage, on a proposed
purchase. Based on financial performance, a
business can support only a certain amount
of debt. The balance of the price is made
up of equity from the buyer. If a price is
higher than the amount of debt a lender
is willing to extend plus the amount of
equity a buyer is willing to contribute,
the transaction cannot take place. Even
if buyers have sufficient equity to “make
up the difference,” they must take into
account what the return on that equity
is. Paying an unreasonable premium over
market will result in a low return on equity for the buyer.
Capex
Capital expenditure requirements are also
a very important factor to consider and
can have a dramatic impact on valuation.
We think about Capex as falling into the
following two buckets:
1) Deferred maintenance Capex. Buyers
expect a business to be fully functioning,
while sellers may take an “as-is” perspective. When a buyer discovers non-working
items d \