(X Times Multiple = Resale) and your Exit Strategy

“Begin with the end in mind.”-Steven Covey

When you are making the important decision about investing in a franchise, you should begin with the end in mind. Before going into business, you should have a long-term plan for ownership which includes an exit strategy for when you have reached the full lifecycle of your franchise business.

Your choice of an exit plan will influence business development decisions. Maybe your goal is to make x amount of money, valuing your business can help you estimate how many years it will likely take to reach said goal. Perhaps you will need multiple units to achieve your goal in your timeline. Knowing what the end result you want is will make you more effective and efficient towards those goals.

A key aspect of any exit strategy is business valuation.  One of the most common ways to estimate the value of a business is by calculating earnings before interest, taxes, depreciation and amortization (EBITDA). Simplified, this is revenue minus expenses (x) and the multiple would be the industry’s average. Before buying a franchise, do some research as to what the valuation multiple for the industry is. Keep in mind there is no exact science to valuing a business and it is rare that a buyer and seller will come up with matching valuations. Used as a rule of thumb, equations like EBITDA can help you come up with a strategic plan when it comes to exiting your business.

Inevitably, every franchisee will exit a system. Some of the more common reasons for exiting are retirement, life change, time horizon goal is achieved, or the business is not a fit. Plans and priorities change and often life changes can happen unexpectantly and suddenly making having a strategy in place already extremely important.

When considering a franchise, ask what kinds of resources and programs they have in place to help during times of transition. Sport Clips Haircuts for example has several programs in place to help their franchisees best exit their business ownership when the time comes. Second Generation is a new initiative to help with the transfer of ownership to family members, helping them represent the brand a highest level. There is also a comprehensive guidebook with checklists for various scenarios and a suggested timeline with items to consider and sample agreements.

While it may seem far in the future, having an exit strategy is one of the first things you should formulate when buying a franchise. It helps give you a plan and helps you achieve your personal and financial goals with more accuracy and efficiency.  And remember a good exit strategy is also flexible, no one can completely plan for the future, but having a business ownership strategy in place helps tremendously.