Is A Franchise Right For You?
By Peter C. King, CEO of VR Business Sales/Mergers & Acquisitions
Making the decision to purchase either a private business or a franchise is an important decision when you start out to begin a new business venture. There are many choices, challenges, and many benefits to a franchise opportunity so it is vital to really understand the nuances before you sign on the dotted line.
Unlike a private business, you are literally buying into a business structure with standards and practices that need to be followed in order to do business. If you are not one to “stay in the lines” a franchise might not be your best fit.
However, if you are in fact looking to step into a plan that is in place with corporate support so you are not going it alone, then finding a franchise opportunity that fits your personal and business values might be a great idea for you.
Step 1: The Initial Interview
The first interview and presentation of the franchise concept is most likely conducted by telephone or video conference with a franchise sales representative. The franchise sales representative helps you understand who the franchisor is, what makes the franchise opportunity unique, and who makes a successful franchisee. (Though face to face meetings still happen in the early stages, they are becoming less frequent unless meeting at a trade show or exhibition) You both begin the process of determining whether or not this will be a good fit on both sides.
Step 2: Qualification
At this stage, the franchisor will seek to gather and offer more specific details, including whether you have the financial capital to undertake this business venture. Create an open and honest dialogue with the franchise rep, so that they can advise you on a potential fit due to their insider’s perspective on what it takes to create the best results in their particular system and environment.
Step 3: FDD and Franchise Agreements Review
Most buyers at this phase conduct a business review of the terms and conditions of the FDD (Franchise Disclosure Document) to make sure that both you and the franchisor are in agreement on all major points. The FDD is a document the FTC mandates each franchisor to offer franchise candidates. Some states may require additional disclosure information in the FDD.
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Changing The Approach
How Unlimited Choices Have Given Way to New Marketing
By JoAnn Lombardi, President of VR Business Sales/Mergers & Acquisitions
Since the beginning of the 20th century, advertising drove our economy in the form of a pre-packaged, one-way story. Today, it’s a different story. We’ve gone from three channels to 500 and from no web pages to a billion web pages and live streaming. The choices that consumers have today are astronomical. There are more than 250 brands of nationally-advertised bottled water. Starbucks offers 19,000 different ways to order a beverage. With all the options available to the consumer, the shift of power cannot be understated.
The old way of selling on the street corner to anyone that will listen is over. People can easily ignore advertising today instead of being forced to listen.
They can choose what they want to hear, and this is where permission marketing comes into play. It’s better to deliver personal, anticipated and relevant ads to people who want to get them. Once an idea is in the hands of people who care about its success, it may be lucky enough to benefit from digitally-augmented word of mouth. Modern ideas spread online and off, and this is faster and more effective than the old-fashioned centralized way of selling.
What makes a product or service attractive to a consumer isn’t always directly related to what the product does as much as it’s the free prize that you get with the purchase – the extra stuff that comes with it, the stylish bonus, the design, the service provided or the pricing. This is what makes people talk about the product and spread the word.
Marketing is about telling stories that people want to hear. But most of all, it’s about authenticity. Authentic marketing can stand up to the multi-dimensional scrutiny that the Internet brings. It amplifies the story you create and makes it more likely to spread once people become familiar with your product or service. When consumers think that you’re selling a product that is not what you said it is, they stop paying attention and go somewhere else.
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Thoughts on Business Valuation, Microsoft Excel, and Where the Two Meet!
byShawn Hyde, CBA, CVA, CMEA, BCA, ECA, Canyon Valuations, LLC
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What Method to Use? “But we’ve always done it this way!”
Occasionally, when I’m reviewing a valuation report prepared by someone else, I’ll ask why a certain method was used when a different method appears to be much more applicable for use with the subject valuation. Oftentimes, I’ll hear a response very similar to the opening lineup above.
There are appraisers out there who always use exactly the same valuation methods, always project out exactly the same way, and for exactly the same number of years, using the exact same long-term sustainable growth rate, for every privately held business that appraiser has ever valued.
Think about that for a minute. Now consider the following question: Of all the various privately held businesses that exist, are all of them exactly alike? I’ll pause while you think about your answer to that one.
While you are considering, I’d like to point out that business appraisers over the past fifty-some-odd years have come up with a variety of different ways/methods to estimate the value of a privately held business. Some of these methods rely on publicly traded company data, some rely on analyses of transactions of privately held businesses, some rely on theoretical models, while others are sourced from data compiled from analyses of investors in the public markets. Why do all of these different methods exist?
Remember, in the most basic nutshell available, Value equals Income divided by Risk, but the choice as to what income stream and what risk rate we use, is decided based on both the appraiser’s judgment and the data available for the valuation analysis.
Each of the methods we have access to are only useful under specific conditions. For example, one of the more commonly used methods for arriving at a discount rate is the Build-up method.
The Build-up method determines a risk rate for use with the dividend-paying capacity of the subject privately held business as described by the IRS’ Revenue Ruling 59-60. What happens if the appraiser uses some other income stream to derive an indication of value along with the rate derived under the Build-up method? The math still works, one can still divide any income stream by a capitalization rate to obtain an answer, but what if the income stream selected for use was Gross Revenues, Pre-tax net income, or my personal least favorite one to see used, EBITDA?
Each of those calculations will derive a different indicator of value, and all three will be wrong. See the example below:
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The Anatomy of a CIM - Information Memorandum (IM)
The CIM, also referred to as the Offering Memorandum (OM), Information Memorandum (IM), or pitch book, explains in more detail the intricacies of the company being sold and the long-term value of the business.
Although most business owners realize the importance of investing hundreds of thousands of dollars annually in high-quality marketing materials to sell their products and services, many fail to appreciate the importance of having professionally prepared materials when it comes time to explore an M&A transaction.
Having a robust set of investment marketing materials will have a substantial impact on the success of the M&A process in two primary areas:
- Speed: The more questions answered in your marketing materials, the fewer one-off questions you must answer from a potential buyer. This becomes particularly important the longer your business is on the market. It can be easy to lose momentum as the deal process drags on. By anticipating potential buyers’ questions in advance, you’ll make it easier for them to assess their level of interest more quickly — and avoid wasted time on both sides.
- Buyer perception: Human beings are heavily influenced by the appearance of things, and potential buyers are no exception. Presenting your business as professionally as possible in marketing materials is worth the investment. You’ll attract more serious buyers, who will likely (consciously or not) be willing to pay more for your business than they would for an equal organization with amateur materials.
Why do you need a CIM?
After a potential buyer signs your NDA, what do you do next? This is where the CIM comes in. The purpose of the CIM is to help a buyer understand your business and the unique strategic investment opportunity it presents The components of a CIM vary depending on the company’s industry and unique characteristics.
Many CIMs contain the following components:
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35 Unit 40 Bed Assisted Living, East Central MN
The Company’s financial performance reflects the business’ occupancy increase and steady operations along with a positive trajectory and ongoing reputation. The owner has a reliable key staff in place and is poised for continued growth in the rapidly expanding assisted living market.
- Projected Strong Growth in Demand. Over the next two decades, the population of adults over 85 will more than double to exceed 14.4 million people. Depending on when the bulk of the elderly population enters the skilled nursing care system, the swell in demand could exceed the space available.
- Sales for the US nursing homes and assisted living companies industry are forecast to grow at a 5.06% compounded annual rate from 2019 to 2025. The growth rate is faster than the growth of the overall economy, at 3.6%.
- Federal Funding Proposed for Home, Community-based Care. President Biden has proposed to spend $400 billion over eight years on home and community-based services as part of his $2 trillion infrastructure plan.
- Business Exit Rate is much lower than US Average for all businesses. For assisted living and nursing homes, the rating is 1.5, while the national average for all industries is 9 which indicates a SOUND investment.
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VR Office in San Antonio, TX Sold an Established Plumbing Company for $2,400,000
This was an exceptional central Texas, residential and commercial construction plumbing company. Fully bonded, licensed, and insured. This growing, highly profitable business had a successful track record, over many years, of reliable service to its clients. This was a perfect acquisition for a company seeking to add plumbing to its current operations and enter the booming Central Texas market.
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Thinking of selling your business or looking for an established
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Mid & Large Cap M&A – Behind the Scenes
Behind the scenes of mid and large-cap M&A, there are numerous activities and considerations that take place
Here are some key aspects to remember:
1. Strategic Intent: M&A transactions are driven by strategic intent, which can include expanding market presence, entering new markets, diversifying product, or service offerings, acquiring technology or intellectual property, or achieving cost synergies.
2. Deal Sourcing and Screening: The acquirer's management team, investment bankers, or corporate development teams actively search for potential targets that align with their strategic goals. Various sources, such as industry contacts, proprietary databases, or financial advisors, may be utilized to identify potential acquisition targets. These targets are then screened based on criteria like financial performance, growth prospects, cultural fit, and synergies.
3. Due Diligence: Once a potential target is identified and initial negotiations take place, the acquirer conducts due diligence. This involves a detailed examination of the target's financial, legal, operational, and commercial aspects to assess its value, potential risks, and opportunities. Due diligence may involve reviewing financial statements, contracts, customer relationships, intellectual property, regulatory compliance, and other relevant areas.
4. Valuation and Negotiation: Valuation is a critical step in M&A, where the acquirer determines the fair value of the target company. Various valuation methods like discounted cash flow analysis, comparable company analysis, or precedent transactions analysis are used to arrive at a valuation range. Negotiations then take place to agree on the purchase price and deal structure, including the form of consideration (cash, stock, or a combination).
5. Financing: Large M&A transactions often require significant financing. Acquirers may fund the acquisition through a combination of cash reserves, debt financing, and issuing new equity. Financing options may involve arranging credit facilities, obtaining bridge loans, issuing bonds, or seeking investment from private equity firms or other strategic investors.
6. Regulatory and Legal Considerations: M&A transactions are subject to regulatory and legal approvals. Antitrust authorities may review the deal to assess potential anti-competitive effects. Additionally, there are legal considerations related to securities regulations, tax implications, intellectual property rights, and contracts. Lawyers and regulatory experts play crucial roles in ensuring compliance and navigating the legal landscape.
7. Integration Planning: Post-acquisition, successful integration is key to capturing synergies and achieving the intended strategic objectives. Integration planning involves identifying overlapping functions, streamlining operations, combining IT systems, harmonizing corporate cultures, and managing human resources. Integration teams are formed to develop a detailed plan and execute the integration process efficiently.
8. Stakeholder Communication: M&A transactions often impact various stakeholders, including employees, customers, suppliers, shareholders, and the broader market. Effective communication is essential to manage expectations, address concerns, and minimize disruption. Clear and timely communication helps build trust and mitigate potential risks during the transition.
9. Post-Merger Integration: After the deal is completed, ongoing efforts are made to integrate the acquired company into the acquirer's operations. This includes aligning business processes, systems, and organizational structures. Key focus areas include realizing cost synergies, capturing revenue synergies, optimizing the combined company's operations, and maximizing value for shareholders.
Throughout the entire M&A process, M&A experts, financial advisers, lawyers, accountants, and business consultants play critical roles, providing expertise and guidance to their clients to ensure a successful transaction.
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VR is The Only Remaining Founding Firm of The International Business Brokers Association ("IBBA").
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Have You Ever Considered Selling Businesses?
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