Franchises,What,the,Exit,Strat business, insurance Franchises - What's the Exit Strategy?

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At an International Franchising Symposium in London, Peter Holt made thebold statement to his audience of Franchisors that they needed to understandthat their business would fail, and in fact all businesses are bound forfailure. Needless to say, there were a few shocked faces in the crowd. He wasmaking the point that it really is just a matter of the number of calendarflips before time strangles any business. It's a hard point to argue when youthink that the Neanderthal Fortune 100 included Barney's Dinosaur ObedienceSchool. Not a lot of money in that these days.Evolutionary change would seem to indicate that we should all prepare forfailure. Of course, if we do an extremely good job, perhaps our grandchildren'sgrandchildren have the problem, and we can rest easy in the hammock for now. Ina much more practical view of the calendars we get to flip ourselves, we shouldthink about creating a successful Franchise business, maximizing the value, andrealizing the optimum return with an appropriate exit strategy.The folly often lies in not considering this part of the equation at thevery 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 thevalue of the asset that can be created. Ongoing profitability, cashflow, andemotional fulfillment, are all important criteria in the process of making aninformed business decision about becoming a Franchisee. But then so is thegrowth of the asset value you create, along with the ease of realizing thatvalue at the time you intend to exit.Snagglepuss always knew it was 'exit, stage left', but that is not always soclear in the operation of a Franchised business. What is clear is that somededicated thought needs to be applied at the time of entry so that appropriatestrategic planning is put in play. Let's consider a simple example toillustrate the importance of this consideration where you can increase thevalue of the business by $200,000 in five years, and there is a ready andwilling market for the business at the end of that time. A straight-lineapplication of the value increase, without considering the time value of money,would indicate that the real average annual earnings would be $40,000 over andabove the net income of the business. That should tell you that a business that earns $80,000 per year in profitmight actually be a better investment than a business that makes $100,000 peryear, if the latter has significantly less realizable value at the time ofexit. If the plan is succession to family members, then again, the value of theasset to be transferred is of paramount importance, and not just the annualincome.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'sCruise Lines would have been much more valuable before he met Thurston andLovey. That would indicate that we shouldn't put the hen's product all in onewicker 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 togo 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 becausethey 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 planwould include both the profitability of the venture, and also the ultimate cashvalue at the end of the rainbow. The Franchisor should be able to provide youwith pertinent information about asset growth, and the factors that will affecttransition. If they are unwilling to discuss the matter, the solution is simple- run! All good Franchisors should be looking for Franchisees that wish to maximizethe value of their business with a well laid out plan. That will only enhancethe value of the Franchise system as a whole, which increases value for eachindividual stakeholder. For the Franchisee, it really should be a significantattraction to become involved in the business in the first place.The 21st century businessperson is the spawn of corporate hijinks andtechnological advancements in today's global marketplace. What mattered in thepast 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 requiredto earn financial freedom. They also understand that the proper equation toassess risk includes both current profitability plus long-term asset creation.Of course, there must also be emotional attachment to the business at handin order to optimize value. If the plan is to grow the business to maximizevalue, and there is emotional commitment to that plan, the results can bedramatic. How important is emotional attachment? I've stayed in hundreds andhundreds of hotels, and yet I've never seen anyone clean the toilet in theirroom. There's simply no emotional attachment to the asset. I've never seenanyone wash their rental car either. Nurturing, prodding, improving, adjusting,and building, all take commitment in order to be the creator of the ultimatevalue.Like a baboon picking fleas, each business opportunity has to be examinedcarefully. The asset value of some service-based businesses will often holdvalue, and in fact increase in redeemable value as each new client is added tothe business. The exit strategy of a retail location should include anassessment of the initial investment required, real estate values, competition,and demographic factors. The history of increases in Franchise Fees should alsobe considered to predict future minimum transfer value.I experienced a good case in point about Franchise Fees. In 1972, a goodfriend and I decided that March break was best spent at Daytona Beach, as allgood first-year college students conclude. We found this new restaurant therethat had line-ups around the block - literally. It was called McDonalds. Whenwe returned to campus, we went to the library to do some research because wewere told that McDonalds might entertain building one more restaurant for theright person. The cost at the time was $25,000. If we could have figured outhow 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 thetime of anticipated transfer are all part of the equation. Flexibility of theFranchisor to address new market opportunities will create new markets for theFranchise. In addition, expansion plans of the Franchisor need consideration.Static doesn't cut it. A plan to continue to bring in new and vibrantFranchisees well into the future will increase brand value, and nurture themarket 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 ofexit 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 HudsonBurnham said "Make no little plans; they have no magic to stir men'sblood." So plan. Plan to profit. Plan to nurture and build. And plan toexit.The factors listed above must be assessed and ranked in order of importancebefore understanding the true value of the anticipated business venture. Themaintenance and growth of asset value, as well as portability on transfer willultimately determine the real return on investment. Even though Barney was on the bleeding edge when he invented the dinosaurbiscuit to reinforce good behavior, his target market ultimately went with thecats and dogs option. Of course, there wasn't a big market for VoIP and Blogsin that digitally deprived age, when zeros and ones referred to the near deathexperiences of that particular day. Oh yeah, and it wasn't that long ago, whenMcDonald was an old farmer. The real message is that Barney should have had a plan to find a buyerbefore Rin Tin Tin and Sylvester showed up on his neighbor's doorstep. Article Tags: Exit Strategy, Asset Value, Would Have, Emotional Attachment