How to Value a Franchise Business

Many businesses struggled to survive during the COVID-19 pandemic, and a number of firms pivoted to new business models to serve customers. The pandemic also revealed the value of operating a franchise. Franchise owners can benefit from the franchisor’s brand awareness and recipe for success. There are currently over 773,000 franchise businesses operating in the US.

If you’re considering a sale, a business broker can help you with a franchise valuation. Using a broker is important, given the unique challenges of selling a franchise. Start the sale process by discussing the potential value of your franchise with an experienced broker.

Uncovering Franchise Value

The buyer’s goal is to purchase a business that consistently generates sales and profits over time. If the business is profitable each year, the buyer can recover the cost of the purchase faster. Buyers also want a smooth transition after the purchase, so that the business maintains profitability.

Established Brand Awareness

During the pandemic, you may have continued to buy products and services from franchise businesses, because of brand awareness. Many franchise owners participate in regional and national advertising campaigns, which keeps the franchise name in front of consumers. When a customer is making a buying decision, brand awareness has an impact.

Predictable Business Model

Of the most attractive features of a franchise is the ability to use a proven business model. McDonald’s, for example, has a uniform system for selecting store locations, hiring employees, and preparing food. A proven system gives a buyer the confidence and capability to operate a profitable business after the sale.

The business model also means that the products and services are consistent, regardless of where a particular franchise is located. Customers know what to expect, have confidence in the McDonald’s brand, and drive repeat business, for example.

Leveraging Training And Purchasing Power

Franchisors insist that owners participate in extensive training, and effective training is an indicator of business success. Franchisors also use purchasing power to obtain discounted prices on products and services. For example, an Ace Hardware franchisee will pay a lower cost for SKIL power tools, because of Ace’s national buying power.

Franchise businesses offer several advantages over independent businesses, but selling a franchise is more complex. A broker can help you manage the sale process.

Factors That Impact A Business Sale

Franchisees must comply with the requirements in the franchise agreement, and the agreement puts restrictions on the owner. When you sell a franchise, the agreement may require any purchaser to be approved by the franchisor.

Franchisors invest a great deal of time and effort into building brand awareness, and they want to know about every new franchise purchaser. A buyer must demonstrate an ability to operate the business, and must have the financial resources to make the purchase.

Here are some other potential restrictions:

  • Transfer Fee: Some franchises charge a transfer fee to the franchisee when a sale is completed.

  • Liabilities: The franchisor may prohibit the franchisee from selling a franchise until all franchise-related liabilities are paid.

  • Non-Compete: Most franchise sellers must comply with some form of a non-compete agreement. The franchise agreement may include an agreement not to compete, or an agreement not to solicit the franchise’s customers.

A broker can help you find a buyer that meets the franchisor’s criteria, and will negotiate the sale price on your behalf. The valuation used has a large impact on the sale price you ultimately receive.

Reviewing Valuation Methods

There are a number of methods used to value a franchise, and your broker will work with potential buyers on valuation issues.

Franchises are often valued based on a multiple of revenue, cash flow, or earnings before interest, taxes, depreciation, and amortization (EBITDA). As the name implies, the EBITDA method adds back some expenses to the earnings total, and a franchise can be valued at 4 to 5 times EBITDA.

The valuation will take into account hard assets (depreciable fixed assets) owned by the franchise, and the sales of comparable businesses.

A valuation may also assess the business based on the future income it can produce for the owner. The seller’s discretionary earnings (SDE) is based on this formula:

(Pre-tax, pre-interest earnings) + (vehicles, travel, other transactions listed as business expenses)

SDE adds back business expenses that have some personal benefit to the owner, including vehicles used by the owner, charitable donations, and the owner’s salary.

The valuation is one of many issues that a broker can address during the sales process.

Find An Expert

The business brokers at Raincatcher help entrepreneurs sell remarkable companies, and they have participated in thousands of business sales. Raincatcher provides several types of valuations, including Certified Business Valuations.

A broker can free up your time, so you can operate your business during the sale process. Work with the experienced brokers at Raincatcher and sell your business in less time, and for a higher price.

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