If you are thinking about selling your franchise, you will want to conduct a franchise valuation to determine the value of your business. Ultimately, your franchise will be worth what someone else is willing to pay. However, making an informed decision before putting your franchise on the market will help you exit the franchise system well.
Factors for conducting a franchise valuation
Valuing a franchise involves considerations that are both similar to and unique from valuing a fully independent business. For example, while you need to determine the depreciated value of your company’s assets, in the context of a franchise, certain assets will be excluded from the business’s valuation. Most notably, a fully independent business will own trademarks and other intangible assets (such as copyrighted materials, customer lists, and other proprietary information) that can significantly increase its valuation. In the franchise relationship, these assets belong to the franchisor. On the other hand, in some circumstances, the franchise relationship can add value itself, and your franchise agreement could be an asset that adds to your overall valuation.
Some other factors involved in valuing a franchise for purposes of a potential transfer include:
1. Physical assets
Any physical assets your franchise owns will be relevant to determining its valuation. This includes everything from back-office computers and furniture to point-of-sale systems and inventory. These items must be depreciated to their present value in order to determine what someone would pay for them today.
Earnings before interest, depreciation, taxes and amortization, or “EBIDTA”, is a rough calculation of a business’s available revenue. It is often used to determine a business’s value, but other calculations are used as well. Determining the appropriate calculation (and the appropriate multiplier) for your franchise will require a critical assessment of the particular circumstances involved.
Your franchise’s location can play a role in its valuation in a few different ways. For retail outlets, a prime location can add significant value and provide leverage in transfer negotiations. For brick-and-mortar and mobile franchises, a desirable franchise territory can drive value as well. Location will also be relevant when comparing the value of other businesses on the market and those recently sold. If you have an office or retail lease, your lease contract can be an asset with independent value as well.
4. Remaining term and renewal rights
How much of your current franchise term is remaining? How certain are your (and your prospective buyer’s) “rights” of renewal? Will the buyer be required to sign a “then-current” franchise agreement? Will the buyer be able to start with a new initial term? These are all fundamental considerations for valuing and selling a franchise as well.
5. Recent sales
Finally, when valuing a franchise, recent sales will serve as “comparables” – similar to nearby homes in residential real estate transactions. But, just as no two homes are exactly alike, no two businesses are exactly alike, either. Franchisees should be careful to avoid placing too much emphasis on recent franchised and non-franchised business sales.