Businesses with Multiple Locations
A business with multiple locations may be a retail-oriented business (such as a restaurant, laundromat, or beauty salon) with multiple store-front locations serving a growing customer base or a service-oriented business (such as a healthcare company, appliance repair business, or staffing agency) with branch offices allowing the business to operate in expanding geographic regions. When it comes time to sell, a business with multiple locations often receives a premium valuation. This is because the business plan and operating model of a business with multiple locations has proven itself to be sound and capable of being replicated for even more growth and expansion. The proven competitive advantages (the ability to offer a product at lower cost than competitors a superior service which competitors can not match) of a business with multiple locations will drive up its valuation.
Include All Locations in Sale of Business
Owners of businesses with multiple locations must first decide whether to sell their entire company (with all the locations) or to sell each location individually. In general, it is preferable to sell the entire company all at once. The key to most businesses with multiple locations is its intangible value and specifically its brand. The brand is known and recognized by its customers, suppliers, and employees. The value of the brand will only be maximized in a sale if all of the locations are included. Otherwise, the brand may be diminished if more than one owner is operating different businesses with the the same brand. The quality and consistency of the products or services may differ if there is more than one owner for the same brand, which may eventually lower the value of the brand.
Maximize Value When Selling Business with Multiple Locations
The premium value given to businesses with multiple locations is due to its intangible assets. A company’s intangible assets are non-physical in nature and include its brand, goodwill, name recognition, leasehold rights, customer relationships, employee relationships, and intellectual property. The fact that the business model of a business with multiple locations has proven to be scalable is a reflection of its intangible assets. A scalable business is one which can increase production and output without being hampered by its structure or resource limitations. It is not sufficient to merely purchase more physical assets (such as equipment or vehicles) in order to be scalable. A business that is scalable harnesses the power of its brand to reach more customers by using its existing business model and management techniques.
Example of Selling Business with Multiple Locations
- Jimmy is the owner of ‘Jimmy’s Pizza Pies’ with four locations throughout Palm Beach County, Florida.
- Because he is retiring, Jimmy contacts a business broker about selling his pizza chain.
- Jimmy explains to the broker that he thinks it will be easier and faster to sell each location individually rather than all the locations together as a package deal.
- The business broker examines the financial records of the business, and discovers that each location earns $100K/year of adjusted owner benefit, for a total of $400K/year for all four locations combined.
- Each individual location is likely to receive about $200K or two times the adjusted owner benefit, resulting in total proceeds of $800K (for four location).
- By selling the pizzerias individually, Jimmy will receive a lower overall price as opposed to selling them all together as a pizza restaurant chain.
- A pizza chain (with four locations) has more value to a buyer.
- The chain of pizzerias when sold together is likely to receive a higher ‘multiple of adjusted owner benefit’ of three times (or more) the total adjusted owner benefit (of $400K/year).
- This equates to a total purchase price of $1.2M (or more).
- The synergistic benefits of having four locations (with lower marketing expenses, administrative overhead costs, and supply costs per location) combined with the power of a branded pizza chain known and recognized throughout Palm Beach County drives up the valuation.
- Moreover, buyers of a pizza chain (as opposed to buyers of one pizzeria) will understand that the TAM (Total Addressable Market) is large and growing.
- This means that the buyer of the pizza chain will reasonably assume that they can further scale the business by opening additional locations to serve even more similarly minded potential customers.
- A business with a large and growing TAM will generally receive a higher business valuation.
- Jimmy is also taking a great risk by selling each location individually.
- If one of the buyers of a single location diminishes the brand of ‘Jimmy’s Pizza Pies’ by making subpar pizza or by providing subpar customer service, then the value of the overall brand will also be diminished.
- This could greatly affect the value of the other locations, and is a problem to be avoided.
- Jimmy thus agrees with the business broker that it is best to sell the entire pizza chain together.
Potential Buyers of Businesses with Multiple Locations
Most individual buyers will not have the financial resources or experience to purchase a business with multiple locations. Instead, private equity buyers and competitors within the same industry often purchase such businesses. Private equity buyers are institutional or accredited investors who use pooled capital for investment activities. Often they pursue businesses with multiple locations with the hopes of further expanding the business and ultimately selling the business for a substantial premium above the original purchase price. Competitors within the same industry also frequently acquire businesses with multiple locations as a way to establish a toe-hold within a specific geographic area that they are not currently servicing.
Business owners with multiple locations should consult a business broker with experience in selling such businesses. It is crucial to establish the right strategy of structuring the sale so that the brand is not diminished by dividing use of the brand among different owners. In order to receive the maximum purchase price for a business with multiple locations, it is necessary to properly value its intangible assets (or brand) in the context of its Total Addressable Market (TAM) and scalability.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.