Should you consider acquiring a franchise unit that isn’t as profitable as it should be? The answer is a qualified “yes.”
If you see indicators that adding capital, staff, or operational improvements could improve profitability, you should definitely consider it. Here are some things to look for.
The current owner made business decisions that aren’t working. Perhaps they varied from the proven franchise formula or strategy. Perhaps they made a bad hire that cost them business or the expense of a lawsuit. Some owners sign lease agreements that are too costly or have locations where the landlord allows the curb appeal to deteriorate over time. If there’s a chance to improve the location or the terms, you can affect the bottom line.
The current owner is running personal expenses through the business. Many owners choose to employ a tax mitigation strategy while they’re running the business. They don’t realize, until they’re ready to sell, that the addbacks are hurting their SDE (Seller’s Discretionary Earnings). The SDE is what buyers are most interested in, and it’s the number they’ll base the multiple they offer on. When you examine the financials, you may see that addbacks affect reported earnings; fixing that issue could quickly make the business more profitable.
The unit’s staffing model is not working. The current owner might have too few staff to handle demand or provide great service. You might also see units that are overstaffed for the level of business they have. The owner might not have fired a toxic team member who is hurting business or bringing down morale. You might also see cases where staff are being overpaid; normalizing salaries can increase profitability. If any of these scenarios is true, making changes will quickly improve the unit’s financial performance.
The costs of goods sold aren’t proportional to the unit’s performance. It may be that the current owner has not raised prices or isn’t renegotiating supply or vendor contracts when needed. They might not be paying close attention to invoices or other expenses. If you cut costs while growing revenue, you can see a quick return on your investment.
There is waste in materials or processes that can be remedied. Employees may be careless with supplies or work, creating waste that can eat into profits over time. Training and better operating procedures can make a difference quickly. Staff may also be taking too many steps or too much time to complete necessary processes. If they’re not needed to provide a high-quality product or service to customers, adjusting or eliminating them can increase both productivity and profitability.
Adding another service or product is an option. Shipping stores that offer printing services are more profitable. Fitness centers that offer group classes or tiered personal training programs attract more and better-paying customers. It might be that the owner is overlooking opportunities to increase sales, such as encouraging customers to buy premium or bundled services or upselling by adding related products or services. Making small changes can energize staff and increase sales revenue with relatively little effort.
Brokers and buyers will analyze the financial data of units that compare to the unit listing. It’s possible a business can see a profitable turnaround under new ownership, and savvy buyers look for both quick wins and long-term strategies to help it achieve its full earning potential.
