Tommy (not his real name) bought his first franchise 21 years ago. Today, he has eight franchise locations across middle Tennessee. Though his franchiser didn’t like the idea, when he started his first franchise Tommy decided to own the real estate, and he now owns the land and buildings for all eight locations.
Tommy and I were recently talking about the strategy and timing to sell his company. During our discussions, he realized he has two different businesses, the eight-location franchise operation, and the eight-location real estate portfolio. We will package the company as two businesses. We will sell the eight franchises as one business with the buyer paying market rents to Tommy. Once that deal is closed, he will spin off the real estate to a third party, likely a local real estate investment trust.
Today, Tommy’s day-one decision to own real estate looks brilliant. The real estate value has grown tremendously, and his loan to value is 35%. However, he acknowledged that owning real estate slowed down his franchise growth plans. “I am constantly dealing with the bank’s dad gum loan covenants. There have been times I’ve had to delay or even postpone investments in my franchise growth. Looking back on it, had I not owned the real estate, by now I might have twice the number of franchise locations, maybe even 20.”
After the sale of his two businesses, Tommy will have more money than he ever expected, so it’s hard to say his decision to own real estate was a mistake. But, his comment about how investment in real estate slowed down his franchise growth is no small consideration. As he grew his business over those 21 years, every new location was incrementally more profitable because he could leverage his operating overhead. So just think, if he had 16 locations instead of 8, today his operating profit would likely be more than doubled. Of course, the higher the operating profit, the higher the multiple to be paid on that operating profit.
Hmmm, maybe the franchisor was right?
JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. https://www.amazon.com/Home-Pros-Guide-Selling-Business/dp/1599329239 . He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The principles above are true, but the names and fact patterns are changed to preserve the parties’ identities.
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