M&A has always been cyclical, but the environment right now is beyond anything we’ve seen before. That’s because of the long-anticipated ‘M&A super cycle’, fuelled by the retirement of the baby-boomer generation.
So, as baby boomers sell their beloved businesses, we are seeing the beginning of what promises to be trillions of aggregate deal values and liquid wealth transfer from the M&A industry.
The power of this super cycle has shown itself in the record M&A numbers we experienced in 2021, despite the lasting effects of a global pandemic. But there was also an unexpected factor playing into this M&A boom: millennials selling their businesses in order to move on to other ventures.
After building a successful business, millennials differ from baby boomers in that many of them will decide to sell and try something new, rather than stick with the business as a lifelong career. And as millennials reach the age where the businesses they began have reached a size worth selling, we are seeing two generations simultaneously contribute to this super cycle.
Franchising cannot escape this wave; just like any other business, this industry will see an explosion in sales in the coming years.
The year of the franchise
While the pandemic has certainly challenged the operations of many industries, 2021 is being touted as the “Year of The Franchise.”Franchise sales at year-end have reached a run rate of pre-pandemic numbers and we predict that the country’s dramatic change in work/life practices will push beyond previously forecast growth for 2022.
We count three key trends that will drive the franchise base growth with both current and new prospects:
1. Unemployment / alternative employment
Out of work and/or migrating professionals are increasing the candidate pool of franchisees
2. Financially sound investment
Low-interest rates and stimulus program incentives combine to provide extraordinary funding for entrepreneurs
3. Available locations
Business closures have created record numbers of storefront vacancies well suited for new franchise operations.
It’s important to be educated about what goes into selling a business, because preparation could begin years ahead of an actual sale. That is particularly relevant when it comes to selling your franchise.
One unique consideration that you will have to address as a franchisee is that both you and potential buyers will be required to adhere to the exit terms of your franchise agreement. There could be limitations as to how, when and to whom you can sell your franchise.
It’s been our experience that most franchisors contemplate and wish to support the sale of the franchise at some time in the future. Knowing what you can and can’t do will best prepare you for your transaction.
Let’s take a look at the two broad areas you need to think about if you will someday sell: growing your business so that it is ready for sale, and preparing for the sale itself.
Preparing for sale
The biggest problem with companies whose exit strategy is a sale is that they simply aren’t prepared for it. And there’s no way around it: the preparation takes time. The average transaction takes over a year; just getting the documentation together can take two to three months, and without extensive documentation, you won’t get the best deal – or any deal at all. So you’ll have to start preparing two to three years out from a target sale date.
During these two to three years, a primary thing to keep in mind is risk. Potential risks will worry buyers, and therefore affect valuation. As a seller, you want to eliminate as many risks as possible, and provide details (remember: documentation) that minimize risks in the potential buyer’s mind.
One potential risk is having a business that is too dependent on one person, especially if that person is the founder who is looking to leave after a sale. Buyers will want to see that the company has an established leadership team, and that these employees are ready to step into the founder’s shoes and maintain relationships with customers
Understanding the deal
So, you’ve prepared your business to sell, and are looking for a buyer. When considering the sale of a business, it’s natural to focus on the price tag. But that’s just one of three components of a transaction: price, structure and synergy. And to have a successful sale, you need to be prepared in all three areas.
Just like selling your house, you’ll have to do your research on who is best suited to be your M&A advisor. You will want to be very thoughtful about who is going to be in your corner to guide the process and maximize your fi nancial results from the sale.
While the total price is important, of course, the deal structure represents how and when you will get paid for the sale and in what form. Synergy refers to how you and your stakeholders will align with the new company ownership. How your employees, suppliers and customers will be affected by the transaction will almost always affect your decision-making process. And synergy is particularly important if you are intending to remain involved yourself in some way going forward after the sale.
Understanding the buyer
Another thing to understand is just how thorough, in their study of your company, that prospective buyers are “they won’t miss much. That’s why a quality-of-earnings (QoE) report has become crucial to selling a business.
Once a potential deal gets to the stage of producing a “letter of intent,” in which the parties enunciate their desire to enter into a transaction and summarize the main terms, the potential buyer will initiate the due diligence process.
This will most often involve engaging third parties, including an accounting firm, to validate the data that underpins your business operation and financial performance. It’s very important that you are prepared for the due diligence process, including these QoE reports.
The franchise industry, like so many others, is certainly getting swept up in this M&A boom. But, while we all know just how important it is to capitalize on positive momentum, it is even more important for business owners to understand how selling their business works – and be best prepared for it.
Five key focuses when growing for sale
- Have a plan. You should have a strategic growth plan that is written down so that your whole team is familiar with it, and onboard with it
- Build a culture. You need strong core values while still remaining flexible and open to change
- Assemble a leadership team. Buyers won’t like a company that relies too heavily on the owner. Invest in a reliable team who step up after a sale
- Reward success. Figure out what matters most to you, let your team know how you’re measuring it, and reward on it
- Seize momentum. Recognize momentum when you have it and ride the wave. If you don’t have any, make finding momentum a priority.
The author
David Fergusson is executive managing director of M&A and Technology Practice Leader for Generational Equity, the leading middle-market investment bank for privately-held businesses
