Hi folks,
I have an opportunity to acquire a small franchise network with 11 franchisees. The franchisees provide non-medical home healthcare services (like staffing sitters and nurses for older and disabled people), and there are no franchise locations owned by the network.
The owner of the network has been ill himself, and has not been actively involved in the business since 2012. He's looking to sell it at what I would consider a VERY rich price (I'll lay out the details below), but I wanted to get some thoughts on this.
OPERATING NUMBERS:
-Fee per new franchise: $35K
-# existing franchises: 11
-System sales: $5.5M
-Net recurring/royalty sales (in 2014): $285K
DETAILS:
-1 long-term employee who runs the business (overpaid at $115K salary a year)
-Sytems, training manuals, platforms and trademarks are owned by the company; franchisees have to sign non-compete clauses, so they can't just leave the network and start a competitor
-Business provides back office services to the franchisees, and also arranges conferences and such
-Business is earning about $70K a year in pre-tax cash flow (after advertising, overhead, etc...), and this includes the payment of salary for the employee above
PROS:
-Potential for new markets across the country/new franchisees
-Low capital costs
-Business not heavily reliant on technology
-Already established with good branding and known in region where most franchisees located
CONS:
-"Key man"; if this long-term employee quits or decides to open her own business, how will I run it? I could hire someone else, but they won't come cheap. The current owner is pretty much uninvolved at this point, and the business is on cruise control.
-Competitive; there are a couple of much bigger franchise networks across the country
-Potential for franchisees going bankrupt; I have not seen P&L from the franchisees, and also have not spoken to any of them yet. I don't know how they are performing, but I know that one (in a relatively isolated area away from HQ) is not doing well
-If franchisees fold or don't renew the agreements, there is a potential loss of income
PRICE:
-Asking price is $850K, and he's willing to carry a $150K note for 5 years at 7%
-I have $300K in liquid cash (plus retirement assets, but I can't cash those out)
-Vendor is not willing to explore an earn-out/contingency deal for the business
-I would have to borrow the remaining purchase price (whatever it may be), and since the business has no tangible collateral, I'm looking at a personal guarantee for the balance.
Overall, you guys can probably figure out my biggest concerns (key man, bad franchisees, outrageous asking price), but I also feel like if I could get price down to something more reasonable, then this might be a good opportunity.
The owner thinks this should be priced like an "owner operator" business, in which case it would be amazingly profitable, but I don't want to do that. I want to have someone continue overseeing the day-to-day operations and support the franchisees, while I work on the business by thinking of new marketing initiatives to grow revenues FOR the franchisees, and also expand the number of franchisees. I think there is a market to at least double the number of franchisees across the country in the next 2-3 years, in which case it would make a great purchase, but I am also unwilling to pay upfront for some opportunity that may never happen.
I'm meeting with the owner next week for the first time, but I wanted to get some thought on this from the generous folks on this site. Let me know what you think.
I have an opportunity to acquire a small franchise network with 11 franchisees. The franchisees provide non-medical home healthcare services (like staffing sitters and nurses for older and disabled people), and there are no franchise locations owned by the network.
The owner of the network has been ill himself, and has not been actively involved in the business since 2012. He's looking to sell it at what I would consider a VERY rich price (I'll lay out the details below), but I wanted to get some thoughts on this.
OPERATING NUMBERS:
-Fee per new franchise: $35K
-# existing franchises: 11
-System sales: $5.5M
-Net recurring/royalty sales (in 2014): $285K
DETAILS:
-1 long-term employee who runs the business (overpaid at $115K salary a year)
-Sytems, training manuals, platforms and trademarks are owned by the company; franchisees have to sign non-compete clauses, so they can't just leave the network and start a competitor
-Business provides back office services to the franchisees, and also arranges conferences and such
-Business is earning about $70K a year in pre-tax cash flow (after advertising, overhead, etc...), and this includes the payment of salary for the employee above
PROS:
-Potential for new markets across the country/new franchisees
-Low capital costs
-Business not heavily reliant on technology
-Already established with good branding and known in region where most franchisees located
CONS:
-"Key man"; if this long-term employee quits or decides to open her own business, how will I run it? I could hire someone else, but they won't come cheap. The current owner is pretty much uninvolved at this point, and the business is on cruise control.
-Competitive; there are a couple of much bigger franchise networks across the country
-Potential for franchisees going bankrupt; I have not seen P&L from the franchisees, and also have not spoken to any of them yet. I don't know how they are performing, but I know that one (in a relatively isolated area away from HQ) is not doing well
-If franchisees fold or don't renew the agreements, there is a potential loss of income
PRICE:
-Asking price is $850K, and he's willing to carry a $150K note for 5 years at 7%
-I have $300K in liquid cash (plus retirement assets, but I can't cash those out)
-Vendor is not willing to explore an earn-out/contingency deal for the business
-I would have to borrow the remaining purchase price (whatever it may be), and since the business has no tangible collateral, I'm looking at a personal guarantee for the balance.
Overall, you guys can probably figure out my biggest concerns (key man, bad franchisees, outrageous asking price), but I also feel like if I could get price down to something more reasonable, then this might be a good opportunity.
The owner thinks this should be priced like an "owner operator" business, in which case it would be amazingly profitable, but I don't want to do that. I want to have someone continue overseeing the day-to-day operations and support the franchisees, while I work on the business by thinking of new marketing initiatives to grow revenues FOR the franchisees, and also expand the number of franchisees. I think there is a market to at least double the number of franchisees across the country in the next 2-3 years, in which case it would make a great purchase, but I am also unwilling to pay upfront for some opportunity that may never happen.
I'm meeting with the owner next week for the first time, but I wanted to get some thought on this from the generous folks on this site. Let me know what you think.
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