How to value your franchise opportunities
- 1. Be transparent with all costs A potential franchisee will always ask how you arrived at your initial franchise-fee, so make sure you are prepared by formulating a comprehensive breakdown of your franchise set-up costs. ...
- 2. Foster a mutually beneficial relationship ...
- 3. Consult the professionals ...
- 4. Select a suitable profit-assessment model ...
- 5. Adapt and survive
Should you buy a franchise business?
Others also have their unique reasons on why they buy a franchise business. One of the few good reasons of buying a franchise business is that it lets you avoid all those potential risks experienced by other start ups. This is also a one way of being smart.
How much will it cost to franchise my Business?
There are currently 14 registration states with franchise registration fees ranging from $250 to $750 plus additional legal fees leaving you potentially $15,000 to $25,000 out of pocket. A Federally Registered Trademark will set you back $1,750 to $7,500.
What does it cost to franchise a business?
Franchise costs include the purchase of equipment and the start-up costs. You typically spend $18,500-$8500 to franchise your business. It depends on your franchise team, the industry you are in, and the level of support you need to decide what amount of costs you will incur.
How can we increase a franchise business?
- You could start the business with the intention of franchising your idea
- You open one location that is a success and want to expand to more locations so you decide to use franchisees for the new locations instead of owning them
- You open multiple locations and then decide to sell the locations to a franchisee or franchisees
What is a good ROI for a franchise?
The General Rules of Thumb However, there is an oft-repeated rule of thumb that, after the second full year in business, a franchisee should be realistically able to anticipate a 15- 20% per year ROI plus an equitable salary for whatever work they do in the business.
How do you determine if a franchise is a good investment?
The most profitable franchises are the ones with the highest ROI, therefore, you want to find a franchise that demonstrates large profit margins, and relatively low operational expenses. A good place to start is low overhead franchises.
What are the five qualities of a good franchise?
5 characteristics of a good franchiseeAbility to follow instructions. The foundation of the franchise model is that all franchisees follow the same system, offering the same products and services in their respective territories. ... Adaptable to change. ... Driven. ... Similar qualities to franchisor. ... Forward-thinking.
How do franchise owners get paid?
How do franchise owners get paid? Franchise owners can pay themselves a salary or depending on their business entity, they may be able to take a draw from their accumulated equity.
How much do franchise owners make?
When researchers accounted for the inflations caused by the few top franchises, it was established that the average annual income of 51 percent of franchisees is less than 50,000 dollars. The study also found that only 7 percent of franchise owners earn over 250,000 dollars a year.
What are three features of a franchise?
Franchise Meaning, Definition and Features of FranchiseWell established business. ... Needs limited investment. ... Easy entry in new markets. ... Business has large establishments. ... Helps in diverting business risks. ... Results in a large turnover. ... Separates labour and specialisation. ... Allows use of brand name and trademark.More items...•
What makes a successful franchise owner?
Soft skills go a long way in business. Franchise owners engage with people on a daily basis. Being personable and friendly are key factors for success. Positive interactions with customers, employees, vendors and the community are essential in developing those all-important relationships.
What are the elements of a franchise?
The 5 Elements of a Successful FranchisePowerful business systems.Serious brand power.Innovation.Powerful franchisee training.Wealthy franchisees.
What is the failure rate for a franchise?
Coincidentally when I was with NatWest I managed the survey for the last 22 years. Pretty much every year the survey has been conducted has shown between 8-12% of franchise businesses left their franchise each year. This is for a variety of reasons, including retirement, selling, ill-health and financial failure.
What is the most profitable franchise to own in 2022?
Most Profitable FranchisesDunkin'7-Eleven.Planet Fitness.JAN-PRO.Taco Bell.Orangetheory Fitness.Great Clips.Mac Tools.More items...•
What are the rules of thumb for determining whether franchising is a good choice for a particular business?
Stable Environment: For growth of any business it is required to be in stable environment as often changing variables are not feasible for survival and growth of any business, so if business is in stable environment then only it should proceed towards franchising as an option for expansion.
Is owning a franchise profitable?
Buying a franchise might seem like easy money, but those royalties and fees will quickly cut into profit margins. The majority of franchise owners earn less than $50,000 per year.
How many EBITDA multiples are there?
Common EBITDA multiples are three or four, though as low as two and as high as five are sometimes seen as well. I find this technique a good guide and a quick way to assess whether a seller is pricing his or her business at least somewhat reasonably. It should not, however, be the final word.
How to determine shorthand valuation?
But the small, privately-held businesses that change hands on a daily basis lack the luxury of such a clear-cut benchmark. Various rules of thumb exist for determining shorthand valuations—two times revenue, for example, or three to four times EBITDA (earnings before interest, taxes, depreciation, and amortization).
What is sound valuation?
A sound valuation relies on multiple factors, all vetted to the extent possible by due diligence. Revenue is a useful guide to performance and provides some indicator of future direction. Assets (accurately valued) plus a multiple of cash flow represent a good starting point for a total value.
How long is FF&E depreciated?
No buyer would pay that for it. So how to value it? Per IRS rules, most FF&E of the type found in restaurants is depreciated over seven years . That means you can deduct one-seventh of the original purchase price per year of age to arrive at a fair market value (FMV) that the IRS would not likely challenge. Obviously, if the FF&E is seven or more years old, it has no value for transaction purposes.
What is an intangible asset?
One type of asset we did not touch on is the intangible asset. In some industries this might be intellectual property like patents (which can easily be worth a million dollars each). In franchised businesses the franchise fee itself, which represents the right to do business using that brand, has value. Determining what this contributes to valuation is a question of what it would cost to buy into the franchise today and more importantly how much of the original term of the franchise agreement remains (assuming the franchisor’s practice is to transfer the existing agreement).
What is balance sheet?
The balance sheet is one of the triumvirate of basic financial reports (the other two being the income statement, also known as the profit and loss statement or just P&L, and the statement of cash flows). It lists the assets, liabilities, and resultant owners’ equity for a company.
What is the killer of small businesses?
Yet until those credit sales are collected, there is no cash to pay employees or vendors or buy new inventory. Poor cash flow —sometimes resulting from owners who will do just about anything to make the sale—is a major killer of small businesses.
What is franchising business?
Broadly speaking, a franchisor is a business that earns its income by granting the privilege to one or more franchisees to do business and offers some form of ongoing assistance and oversight in return for ongoing monetary consideration.
What is a royalty income fund?
Other franchisors have structured their publicly traded shares as “royalty income funds”, which receive a portion of the royalties from the franchisees, while many of the expenses of operating the system are incurred in a separate company . Examples include Keg Royalties Income Fund and Boston Pizza Royalties Income Fund.
What is a pure play franchise?
Some franchisors are what one might call “pure plays” (i.e. their income derives almost solely from the sale of franchises and the receipt of royalties). On example of this type of franchisor is Dine Brands Global Inc., the franchisor for the “Applebee’s” and “IHOP”.
What is franchising valuation?
Valuing a franchise system, or “franchisor”, is in many ways very similar to the valuation of any other type of business; it is a function of the forecasted levels of cash flows that the business will generate, and the risk associated with those cash flows. Yet there are some particular factors that make valuing franchisors very tricky. This brief article touches on some of them.
What happens to franchisees if the market shifts?
If the market shifts and the franchisees sales decline by 15%, the franchisor’s profit from the restaurant will also drop by around 21%; [3] however, the franchisees’ profits will drop by almost 98%.
How does franchising grow?
For franchisors, growth can come from two main sources: a) growth in the number of franchisees and b) growth in income per franchisee. In addition, growth can also come from acquisitions.
What is income approach?
Under the income approach, the business valuator quantifies the present value of future cash flows associated with share ownership. The calculated future cash flows are discounted at a rate of return appropriate for the risks associated with those cash flows.
What is franchise appraisal?
In a formal franchise appraisal, the appraiser will combine the three valuations to come to a final figure. A valuation of your franchise business may be affected by other factors, as well. One factor is the purpose of the franchise appraisal.
Why do franchisees need to do a valuation?
Franchisees may need to conduct a valuation of their franchise business for a number of reasons. It may be important in order to obtain a bank loan for the business or for personal purposes; it is relevant for tax and estate planning; and, of course, it is critical to know the value of a franchise business when looking to put it on the market. There are several ways of determining what a franchise is worth and ways of going about it. Many individuals ask, “What’s the worth of my business?”
Why is book value low?
Generally, book value is going to result in a very low figure because it does not reflect the valuation of your franchise business as a going concern— i.e., its ability to generate revenue and income. For that reason, book value is of academic interest to an official appraiser rather than a real-world estimate of value. 2.
Why is franchising a strategic buyer?
A franchisor is known as a “strategic” buyer because it can realize certain economies of scale and efficiencies in running a franchise that a third-party buyer cannot.
What are benchmarks of value?
The Benchmarks of Value. In many industries, there are benchmarks available to provide a rough estimate of the value of a business. These benchmarks are usually expressed in terms of multiples of the revenue, or top-line income of the business, or multiples of EBIDTA (earnings before interest, depreciation, taxes and amortization)—a rough shorthand ...
What is the book value of a franchise?
A common franchisee question is, “What’s the book value of my business?” The book value of your business is typically the value of your assets as shown on your financial statements. Because hard assets are depreciable, however, the value of them may be quite low. Real estate, buildings and vehicles, as well as specialized equipment, may have a greater value. Generally, book value is going to result in a very low figure because it does not reflect the valuation of your franchise business as a going concern—i.e., its ability to generate revenue and income. For that reason, book value is of academic interest to an official appraiser rather than a real-world estimate of value.
What does an official appraiser look for in an appraisal?
An official appraiser will look to alternative investments such as U.S. Treasury Bills, the stock market, and other businesses to answer this question, but there are a number of preliminary issues that need to be addressed.
What is the EBITDA multiple for a business?
"Most businesses are sold on a multiple of proven cash flow, through EBITDA or seller's discretionary earnings (owner benefit items that have been expensed through the business). If you're going to sell, you want to eliminate as much seller discretionary earnings as you can because it creates a clean EBITDA multiple for the valuation," said Randy Jones, Head of Originations at ApplePie Capital.
How much is a cash flow multiplier worth?
The average range for cash flow multipliers is four to five times EBITDA. Therefore, if a business has clean tax returns showing $100,000 in EBITDA and an assumed five times cash flow multiplier, that business would be worth $500,000. However, if that same business could prove only $60,000 in EBITDA, and the multiplier remained the same, it would be worth $300,000.
Why should sellers be able to demonstrate positive trends in gross sales and EBITDA?
The seller should be able to demonstrate positive trends in gross sales and EBITDA because doing so will increase the value of the unit in question.
How long should a franchise owner spend on operating costs?
Understanding how franchises are valued. To get the most money from the sale of an existing franchise unit, the seller should prepare to spend two to three years controlling operating costs and creating clean financial records. Franchise owners that cannot or do not take the time to do so run the risk of losing money in the long run.
How long should lease rates be held steady?
A lender will want to see that lease rates are held steady for at least the length of the loan terms.
Can you refinance a franchise?
Finally, buyers who already own successful franchises have the option of refinancing their existing units to pay the down payment on new loans. For example, if you currently have a loan of $200,000 and you need $50,000 in cash, you could refinance at $250,000. This option is only available from a few lenders, including ApplePie Capital.
Can a first time buyer finance a unit?
If the seller can prove that his or her unit has predictable positive revenue trends, it will be much easier for a first-time buyer to finance the unit . If trends are negative, the seller may have to finance some of the deal in order for the transaction to move smoothly.
What does a number in parentheses mean?
A number in parentheses indicates a note at the end of the list.
What does a number beside a franchise mean?
A number in parentheses beside a franchise indicates a note at the end of the list.
What are the rules of thumb?
Keep in mind that rules of thumb are just that. Every business is different and rules of thumb will never take the place of a business valuation or even an opinion of value. Rules of thumb are also not intended to create a specific value or to be used for an appraisal.
Who is William Bruce?
William Bruce is a business broker and appraiser who subscribes to the Business Brokerage Press publications. He consults nationally on issues involved in business transfers and valuation. He may be reached at [email protected] or (251) 990-5934. His business brokerage website may be viewed at www.WilliamBruce.net.
How to calculate franchise value?
To calculate the value of a franchise that has been stable in its EBITDA for the past few years, you can simply take the figure and multiply it by the number of years you think the business will still be around.
What is the first step in calculating EBITDA?
A good first step is calculating EBITDA, or “earnings before interest, tax, depreciation, and amortization.” EBITDA is a measure of your location’s profits before secondary expenses like accounting decisions cut into them.
Why do you ew up a franchise lease?
If you are preparing to meet potential buyers about acquiring your franchise location, ew-up the lease to make the property look much more attractive.
What to look for when buying a franchise?
One of the first things a buyer looks at when acquiring a franchise location is the lease’s remaining term for the business. If they are going to have to renew the lease themselves sometime in the near future, that is an immediate red flag and can quickly derail the whole deal.
Why do franchises have to be paid off?
Debts – All of your franchise’s unpaid taxes and other debts need to be paid off because it’s your duty to disclose them during the sale if they’re not.
Can you sell a franchise location?
Selling a franchise location is not something to be taken lightly, but it’s actually pretty easy to calculate an excellent asking price if you know what you’re doing. Hopefully, with this short guide, you can get a general idea of what needs to be done.
Can you use your mother company's brand for a certain time?
Remember that your franchise is only licensed to use your mother company’s brand for a certain time. Your buyers will almost certainly check that time is not going to expire anytime soon, so do your due diligence by ensuring they’ll be happy with what they see.
Why use SDE multiple?
One major problem with using an SDE multiple to value a business is that the number is backward-looking. When valuing a business, it is important to look at the future, even if you’re the seller. You will want to present a case to potential buyers that your business’ revenues and profits will grow and the business should have a higher multiple as a result.
Why is EBITDA used in cash flow analysis?
Because EBITDA discounts items like depreciation and amortization, it may overstate a company’s ability to cover its liabilities and ignore needed upgrades or replacement of assets. EBITDA is not a substitute for cash flow, and cannot account for the impact made by day-to-day use of cash to cover the expense of the company’s operations. It should always be used with additional cash flow analysis, such as discounted cash flow (DCF).
What are the factors that influence the SDE multiple?
Independence from the owner (owner risk) And many other variables. The biggest factors influencing the SDE multiple are usually owner risk and industry outlook. If the business is highly dependent on you or another owner, it cannot be easily transferred to new ownership and the business’ valuation will suffer.
What is SDE in business valuation?
SDE is the pretax income of your business before non-cash expenses, owner’s compensation, interest expense and income, and one-time expenses that aren’t expected to continue in the future.
How does SDE work?
This is done by adding back in expenses listed on your tax return that aren’t necessary to run your business. This includes your salary as the business owner and any one-time expenses that aren’t expected to recur in the future.
What are tangible assets?
Tangible assets are physical goods owned by the business that you can put a value on. Some examples include real estate (if the business owns any property), accounts receivable, and cash on hand. These are generally not included in the SDE multiple. All tangible assets should be added into the valuation separately (as shown in the examples below) if you are purchasing them.
How much is the multiplier for small business?
In most cases, small businesses are given a business-specific multiplier of between one and four. The multiplier can be impacted by your geographic location, the risk of your industry, or a number of things related to your business.
Franchisors – Who Are They?
valuation Approaches
- There are three main approaches to valuing a business or asset: the income approach, market approach and asset approach. Of these, only the first two have any real relevance to valuing franchisors. Stated very briefly: 1. Under the income approach, the business valuator quantifies the present value of future cash flows associated with share ownersh...
Income Approach
- The three main drivers of value under the income approach are a) the current level of cash flows, b) projected growth and associated reinvestment, and c) risk. Let’s take a look at each one.
Market Approach
- As we discussed above, franchise systems derive their value from many different sources. That can make the market approach difficult to apply; it is difficult to speak of a standard valuation multiple based on revenue in the franchising industry. Thus: While royalty income funds (e.g. Boston Pizza Royalties Income Fund, Keg Royalties Income Fund) have tended to trade at multip…
Conclusion
- Conceptually, valuing a franchise system is in many ways no different than valuing any other business: it requires an understanding of the industry and the business, and the assessment of cash flows and risk. Executing on these concepts can pose a challenge. By Ephraim Stulberg.