Franchise Re-Sales: How to Maximize Value for the Sales of Existing Franchise Units
- The reason why you are selling and if it has any impact on the future of the business
- The details of the financial performance of your business
- The status of employees in the business and whether those important to it plan to stay
- The status and value of the real estate involved in your site
- Proof of all of the information you are providing
How is the valuation of a franchise business done?
In the case of franchises, the valuation of the franchised business is a lot easier because the franchisor would usually have a standard valuation method to be applied to all the business within the franchise concept. These are usually simple formulas which use a multiple of either turnover or profitability of the business to determine a value.
Should I Sell my franchise business?
Selling the business is the main opportunity for a successful franchisee to create wealth and benefit from years of hard work put into the business. For the buyer, it’s important to know that sound valuation principles were used and to prove this to potential buyers.
Why do we use franchise prices?
They can be a good starting point for pricing the business. Many of the franchises are well known while others are very new with just several units. By the time this goes to press, some of the franchises may have folded, sold or merged. We try to keep this as up-to-date as possible. We could use your help.
How to value a business for sale?
The final step of how to value a business is to account for business assets and liabilities that aren’t already included in the SDE. Most small business sales take the legal structure of an “asset sale,” which means the purchaser is buying the tangible and intangible things that make the business what it is.
Why do franchises need to be valued?
Why is the valuation of a franchised business easier?
What is net asset value?
Do banks assess franchise resale?
Do banks confirm franchisor valuation?
What is a good return for a franchise?
What is an “acceptable” investment is 100% up to the investor. 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 sell an existing franchise?
Whether you are ready to sell or you are just considering it, here are our top tips for selling an existing franchise:List your franchise for sale on FranchiseFlippers.com. ... List your franchise on other online business listing websites. ... Reach out to fellow franchise owners in your franchise system personally.More items...
How much can you make selling a franchise?
According to a survey done by Franchise Business Review involving 28,500 franchise owners, the average pre-tax annual income of franchise owners is about 80,000 dollars. However, this number should be taken with a grain of salt bearing in mind that it could be inflated by high incomes of a few top performers.
How do you determine if a franchise is a good investment?
Examine what the growth potential is for the industry you're considering on a national level, especially when it comes to the local market. Next, take note of the most popular franchise trends and how saturated the market is with them. If there are too many, chances are, it wouldn't be wise to invest in it.
How long does it take to sell a franchise?
The average franchise sales cycle is 12 to 20 weeks On average, the total time to close a franchise sale can be up to 20 weeks.
Can you sell back a franchise?
Getting Approval for a Franchise Sale Selling the business back to the franchisor can be a good option, but only if the franchisor is willing to repurchase the business. Furthermore, the franchisor may not be willing to pay an amount that will be sufficient to make you whole.
What is the failure rate of 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 is a major pitfall of franchising?
Hidden Fees: In addition to receiving a percentage of the revenue, a franchise may have additional costs, such as fees for entry, training and marketing. You should carefully review the franchise disclosure documents to make sure you understand all of the fees you will be expected to pay as a franchisee.
Is owning a franchise passive income?
Using the definition above, yes, a franchise can definitely be passive income! In fact, many franchises are set up with the goal of passive income in mind. That's why some franchisees end up owning multiple locations of the same franchise, with a separate staff and minimal oversight to run each one.
What do you call a person who buys a franchise?
The franchisee is the individual who buys into the original company by purchasing the right to sell the franchisor's goods or services under the existing business model and trademark.
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.
Can a franchisee sell their franchise?
For most franchise owners this reward means selling their franchise business to a new owner for the greatest price and at fair terms. But, once the decision to sell your franchise operation is made, it doesn't take long for franchise owners to realize there are multiple paths to consider.
How do you transfer a franchise?
How to Transfer a FranchiseNotice of your intent to transfer. Before you enter into any contract to transfer your franchise, you will usually have to give the franchisor written notice of your intention. ... A written agreement. ... Written approval from the franchisor. ... A guarantee of sorts. ... Payment of a transfer fee.
How do you sell a failing franchise?
CONSIDER SELLING THE BUSINESS Often the best answer to a franchise that is not succeeding is for the franchisee to sell the business to a third party who becomes the new franchisee for that territory. This allows the failing franchisee to terminate its obligations under the franchise agreement and under any lease.
What is a franchise transfer fee?
A transfer fee is the fee a franchisor charges to the franchisee if the franchisee sells the business or shares in the company operating the franchise.
How to value a successful franchise
Firstly, let’s run through how to complete a franchise valuation when your business is performing well.
How to value an unsuccessful franchise
If you’re wondering how to value a failing franchise, the process is a little more complicated, and there are several ways you can reach your figure. The good news is, your unit may be more valuable than you realise; having good contracts, high-quality equipment or other similar assets can bump up the price of a business.
Things to bear in mind when valuing a franchise business
Whatever price you get for your franchise resale, it’ll probably be significantly higher than the cost of a brand new unit. You can justify this additional expense as the business is already up and running and is likely to have existing customers and contracts.
How to get the best price for your franchise resale
Everyone wants to get as much money as possible from their franchise resale. With a bit of careful planning, you can boost your asking price, so here are a few things to bear in mind:
Learn more about franchise resales
It’s normal to feel intimidated by the franchise valuation process, but there is lots of information out there to support you as you sell your business. To find out more about how to manage your franchise resale, see our other guides:
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.
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 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.
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 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.
Do real estate leases affect franchise units?
Similarly, real estate leases will have a significant impact on the value of a franchise unit.
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.
CONSIDERING SELLING YOUR FRANCHISE BELOW COST?
If you are considering selling your existing franchise for less than the cost to start a new franchise, you may not need a valuation. Talk with us to see if a franchise value estimate is best for your situation. In some cases we can guide you to the best strategy and plan to sell your business without needing a value estimate.
DO YOU KNOW THE BEST STRATEGY FOR SELLING YOUR FRANCHISE?
Are you familiar with what a business broker does and if a broker is your best option? Do you know how and if you should try to sell your franchise on your own? Is your franchisor a good partner to help you? Are there other options to consider? Franchise Flippers can help you assess all your options so you can determine which sales strategy is appropriate for your unique situation..
FREE GUIDANCE FROM A FRANCHISE RESALE EXPERT
Selling your business is a big decision. Contact us for a FREE CONSULTATION today. We’ are happy to answer your questions and help you determine your next steps.
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).
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 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.
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).
Why is revenue important?
Revenue is important as an indicator of performance, and revenue trends (is it growing, by how much, and how have growth rates held up over time , for example) are even more important. Using revenue for valuation, however, in my opinion leaves much to be desired.
Is FF&E excessive?
Now, are they realistic? Maybe, and maybe not. The FF&E number is probably excessive. It’s highly unlikely that everything could be sold for that amount. As for the land and building, it depends on the condition of the building, the location of the lot, economic and real estate market conditions in the surrounding area, and more.
Can a building be depreciated?
Why? According to both accepted accounting practices and federal tax regulations, the building can be depreciated, but the land cannot. (The building will age, wear, and eventually have to be renovated or replaced to remain useful, but the lot upon which it stands will still be there.) If arbitrary values must be assigned, a safe rule of thumb is to allot 85 percent of the purchase price to the building and 15 percent to the land.
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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 does a number in parentheses mean?
A number in parentheses indicates a note at the end of the list.
Why is it important to prepare for a business valuation?
It’s important to properly prepare for your business valuation like you’re getting ready to sell your business. You can do this in many ways, such as getting a third-party certified public accountant (CPA) to help you get your books in order or paying off your debt. The important thing is that your business is ready to maximize its sale value.
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.
How many times does a business sell for SDE?
Businesses typically sell for somewhere between one and four times their SDE. This is called the “SDE multiple” or “multiplier.” Think of the industry standard multiplier and the specific business multiplier as two separate numbers, one giving you a general value based on industry averages and another giving you a more specific value based on variable factors of each individual business.
Why do local customers choose one establishment over another?
Many times, local customers choose one establishment over another because they have a personal relationship with the owner. One way to measure this risk is by asking customers what brings them back, and if they would still frequent the location if it was under new ownership. Some of this risk can be managed by the exiting owner remaining on in a transitional capacity for a period of time following the sale.
Is business travel essential?
Business travel that’s not essential to running the business. One-time expenses that are unlikely to recur after the sale of the business, such as the settlement of a lawsuit. In order to get an accurate valuation, it is important that key figures such as those listed above are factored into the equation.
Why do franchises need to be valued?
Often franchised businesses need to be valued for the purposes of resale of the business. Selling the business is the main opportunity for a successful franchisee to create wealth and benefit from years of hard work put into the business.
Why is the valuation of a franchised business easier?
In the case of franchises, the valuation of the franchised business is a lot easier because the franchisor would usually have a standard valuation method to be applied to all the business within the franchise concept.
What is net asset value?
Net Asset Value: This approach looks at the value of assets rather than the earnings which the business generates and is often used in capital intensive businesses where much of the value consists of tangible assets. The net value of a company will be the value of the assets less its liabilities.
Do banks assess franchise resale?
The bank will also usually assess the method of business valuation used, when they assess financing a franchise resale. They ensure that the valuation is in their opinion realistic and market related. The banks usually confirm that the valuation is fair and in line with the franchisor’s guidance. Therefore if you are purchasing or selling ...
Do banks confirm franchisor valuation?
The banks usually confirm that the valuation is fair and in line with the franchisor’s guidance. Therefore if you are purchasing or selling a franchised business, we recommend your refer to the franchisor in order to understand the business valuation method to arrive at a fair purchase price of the business. You can also engage the experts ...
