If you are thinking about selling your franchise, along with assessing your ability to satisfy the conditions for transfer in your franchise agreement, you will also need to determine the value of your business. There are a number of different methods for valuing a franchise – and ultimately your franchise will be worth what someone else is willing to pay – and making an informed decision before putting your franchise on the market will be important to making your exit from the franchise system.
Factors for Valuing an Individual Franchised Outlet
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, while 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 (POS) systems and inventory. These items must be depreciated to their present value in order to determine what someone would be reasonably willing to pay for them today.
2. EBIDTA
Earnings before interest, depreciation, taxes and amortization, or “EBIDTA” is a rough calculation of a business’s available revenue, and is often used to determine a business’s value as a going concern. But, other calculations are used as well, and determining the appropriate calculation (and the appropriate multiplier) for your franchise will require a critical assessment of the particular circumstances involved.
3. Location
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. Your franchise’s location will also be relevant when comparing the value of other businesses that are on the market and that have been recently sold; and, 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 home are exactly alike, no two businesses are exactly alike, either, and franchisees should be careful to avoid placing too much emphasis on recent franchised and non-franchised business sales.
Are you thinking about selling your franchise? For more information, call (202) 293-3947 or inquire online to schedule a free initial consultation today.
