At an International Franchise 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 indeed all businesses are doomed to fail. Needless to say, there were some surprised faces in the crowd. He was pointing out that it’s really just a matter of the number of changes in the calendar 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. There’s not a lot of money in that these days.
Evolutionary change would seem to indicate that we all need to set ourselves up for failure. Of course, if we do an extremely good job, maybe our grandkids’ grandkids have the problem, and we can chill in the hammock for now. From a much more practical perspective of the calendars we shift, we should be thinking about building a successful franchise business, maximizing value, and getting optimal return with a proper exit strategy.
The folly often lies in not considering this part of the equation at the very moment you’re considering going into the franchise in the first place. That is exactly the time when you should seriously consider the value of the asset that can be created. Continued profitability, cash flow, and emotional satisfaction are important criteria in the process of making an informed business decision about becoming a franchisee. But so is the growth in asset value you create, along with the ease of realizing that value by the time you intend to exit.
Snagglepuss always knew what was ‘exit, stage left’, but that’s not always so clear in operating a franchise business. What is clear is that specific thinking must be applied at the time of entry for proper strategic planning to come into 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 linear application of the increase in value, without considering the time value of money, would indicate that the actual average annual earnings would be $40,000 above the net income of the business.
That should tell you that a company making $80,000 per year in profits might actually be a better investment than a company making $100,000 per year, if the latter has significantly less realizable value at exit. If the plan is the succession of family members, again, the value of the asset to be transferred is of paramount importance, and not just the annual income.
Of course, the timing of the exit or settlement will play a significant role and is not always within our control. Gilligan’s partnership involvement in Skipper’s Cruise Lines would have been much more valuable before he met Thurston and Lovey. That would indicate that we shouldn’t put all the chicken’s produce in a wicker bag. Consideration should include both continued profitability and the final value of the assets at the anticipated time of exit.
The value of planning cannot be overstated. The Allies didn’t just decide to take a boat trip across the English Channel to Normandy one sunny afternoon. The Miami Dolphins didn’t win three Super Bowls in a row in the 1970s because they won the coin toss. They even resisted Garo Ypremian’s infamous weakness, for his plan was tight and well executed.
It certainly makes sense that a tight, well-executed business plan includes both the profitability of the business and the final cash value at the end of the rainbow. The franchisor should be able to provide you with relevant information about the growth of the assets and the factors that will affect the transition. If they are not willing to discuss the matter, the solution is simple: run!
All good franchisors should look for franchisees who want to maximize the value of their business with a well-designed plan. That will only enhance the value of the Franchise system as a whole, which increases the value for each individual stakeholder. For the franchisee, first of all, it should be a major attraction to get involved in the business.
The 21st century businessman is the spawn of corporate shenanigans and technological advances in today’s global marketplace. What mattered in the past is not important now, including individual employees, entire departments, and entire processes. The new entrepreneur needs to control his own destiny and will not put his destiny in the hands of others. They won’t risk Mr. Dithers handing them a letter of dismissal. They believe that assessable risk is required to gain financial freedom. They also understand that the proper equation for assessing risk includes both current profitability and long-term asset creation.
Of course, there must also be emotional attachment to the business in question to optimize value. If the plan is to grow the business to maximize value, and there is an emotional commitment to that plan, the results can be spectacular. How important is emotional attachment? I have stayed in hundreds and hundreds of hotels and yet I have never seen anyone clean their room’s bathroom. There is simply no emotional attachment to the asset. I haven’t seen anyone wash their rental car either. Nurturing, producing, improving, adjusting, and building all require commitment to be the ultimate value creator.
Like a baboon collecting fleas, every business opportunity must be carefully examined. The asset value of some service-based businesses will often hold value and actually increase in redeemable value as each new customer is added to the business. The exit strategy for a retail location should include an assessment of the required initial investment, real estate values, competition, and demographic factors. History of franchise fee increases should also be considered to predict future minimum transfer value.
I experienced a good example of franchise fees. In 1972, a good friend and I decided that March break was best spent in Daytona Beach, as all good college freshmen have concluded. We found this new restaurant there that had lines around the block, literally. It was called McDonald’s. When we got back to campus, we went to the library to do some research because we were told that McDonalds might entertain itself by 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 a McDonalds franchise partner, and I bet we would have at least doubled our money.
Transfer portability, the able and willing market, the skills and training required to enter the business, and the anticipated brand value at the time of the anticipated transfer are all part of the equation. The franchisor’s flexibility to address new market opportunities will create new markets for the franchise. In addition, the Franchisor’s expansion plans need consideration. Static is not enough. A plan to continue to add new and vibrant franchises in the future will increase brand value and nurture the market for the franchise system’s product or service.
OK, I didn’t say it would be easy to assess. There is a lot to think about. What I’m saying is that it would be foolish to avoid the subject. The time of exit may be 10 years from now, or 15, or even 25, but at a minimum, it should be considered as part of a long-term strategic plan. Daniel Hudson Burnham said: “Make no small plans; they have no magic to stir the blood of men.” So plan. Plan for profit. Plan to nurture and build. And plans to go out.
The factors listed above must be evaluated and ranked in order of importance before understanding the true value of the anticipated business venture. The maintenance and growth of the value of the assets, as well as the portability in the transfer, will ultimately determine the real return on the investment.
Although Barney was ahead of the curve when he invented the dinosaur cookie to reinforce good behavior, his target market ultimately went with the cat and dog option. Of course, there wasn’t a huge market for VoIP and blogs in that age of digital scarcity, when the zeroes and ones referred to the near-death experiences of that particular day. Oh yeah, and it wasn’t that long ago, when McDonald’s was an old farmer.
The actual message is that Barney should have had a plan to find a buyer before Rin Tin Tin and Sylvester showed up on their neighbor’s doorstep.