Wednesday, June 8, 2011

Franchise Owners Shocked

I just completed a valuation for a couple in the northeast. They own and operate a franchise they purchased 10 years ago. There sales reached $940,000 in 2010 and seem to be holding steady for this year.

The problem? The couple has used up $118,000 in credit card debt to finance the day to day operations of the business. They are in over their head. The husband decided to turn the business over to his wife while he went out and got a "real job" to earn some real money.

The wife is frustrated and ready to throw in the towel and/or divorce her husband. She hates the business and the daily pressure of having to pay bills when there is no money in the bank. She hates it!

The valuation I completed for the business ended up concluding that the business truly had little value other than the fair market value of the assets to be sold. The owners had over-valued the assets to a tune of $100,000. After making that adjustment and attempting to calculate their owner's compensation, the business value is approximately $205,000....

UNFORTUNATELY, they will still have to settle up their balance sheet debt. After keeping the cash, collecting the accounts receivable, they will also be responsible for all the current notes and loans payable. The net result will be a -$64,000. That does not include a $23,000 liability listed on the balance sheet as a "note payable to stockholders."

To say the least, the owner's are in a state of shock and still don't know what they are going to do!

My job was to conduct a valuation of this company, not to provide consulting advice.

Had I been involved in a consulting relationship with this company 12-18 months ago I would have been jumping up and down and scaring the life out of the owners with the stuff I found on their P&Ls. Many of the corrective steps that needed to be taken were quite obvious, others were not so obvious.

I must admit that while I put most of the blame on the shoulders of the owners themselves, I think the franchisor has some responsibility for this situation as well.... where was the monitoring, where was the mentoring, where were the warnings that needed to be raised.

Didn't someone tell these folks that you can't broker out 42% of sales and still have the ordinary ratios of a typical printing firm? You can't broker that much, even if you are marking up costs by 100% or more.

You can't run a $900,000 company 10.5 employees (including the owner)... you will never survive with a sales per employee ratio that poor -- that's $85,714 and that number is off the end of my survival charts!

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