This is a question that I get often from my clients. However, since lawyers are not the most qualified professionals to answer this question (compared to a business appraiser or specialized consultant) I am not the most qualified to answer this question. That said, business valuation is key and must be discussed with your lawyer prior to committing to a purchase agreement. While I am emphasizing the obvious, this issue comes up daily and in many transactions purchasers become “attached” to the idea of becoming a business owner and entrepreneur and let their guard down as to valuation. So while your lawyer can not value your business, you must be taking every step to do so – preferably with the assistance of a qualified business account and certified business appraiser. All of this should be coordinated with your business and franchise lawyer whose job is to ensure that you (and your contract deposit) are legally protected during this review period / due diligence.
Some important factors that a prospective business / franchise purchaser should consider:
- Due Diligence is critical – always insure that you thoroughly review the finances (tax returns, royalty reports, purchase order receipts and register receipts) of the business that you are purchasing to verify the earning claims of the seller.
- Conduct on Site Due Diligence – Don’t stop at a “paper review”, spend time “on-site” interacting with customers and sampling/measuring daily sales. This is not asking too much and the attorneys can structure confidentiality agreements to protect the seller and encourage him or her to provide you with access.
- Include a Due Diligence Contingency Clause – If your financial review/due diligence cannot be completed prior to signing the business purchase or franchise agreement , then ensure that your agreement includes a “due diligence contingency clause” enabling you to complete your review and back out of the agreement if necessary.
- Coordinate Communications – Ensure that your attorney, accountant/valuation professional speak and coordinate their activities.
- Remember that Profits (not gross sales) are Key – This is an obvious point but one that should be emphasized again and again. The most important factor to you will be how much money you get to take home to your family on a weekly or monthly basis and not the gross sales of your business and how much you paid the franchisor in royalties. So don’t get enamored with gross sales, pay attention to the recurring expenses of the business.
Essentially, leave no stone unturned. By the way there are a multitude of valuable resources out their, always be circumspect, but check them out, i.e., www.franchisepick.com, www.thefranchiseking.com, www.unhappyfranchisee.com.