How to Value a Franchise Business in 2023

Many franchisees have benefited from joining an emerging franchise system early in its development. It just requires an additional level of due diligence and a willingness to assume a higher level of risk in exchange for a greater anticipated return. Other franchisors are somewhat less forthcoming with their numbers. Some may limit it to average selling prices, average sales per square foot, average sales per salesperson, or any of a variety of other indicators. Automotive franchises may focus on the number of vehicles serviced per day.

As part of this consideration, the buyer has the ability to go to the landlord and negotiate a lower rent rate. For example, if the building needs to be upgraded, the buyer could cover the cost of those additions and negotiate for a lower rent rate in lieu of a tenant improvement allowance. Additionally, if there are few buyers in the market, the landlord could agree to a lower rate rather than leave the building empty for an unknown period. It’s also the time to clear up any discrepancies between any verbal agreements you’ve made with headquarters versus what’s stated in your contract. Once you’ve identified a franchise that you want to move forward with, you’ll need to figure out how you’re going to finance your business. You’ll receive training from corporate headquarters before opening your franchise.

Business Valuations: When You Would Need One

Let’s cover the principal methods of valuation of a franchise business, the essential determining elements of franchise appraisal, and some of the pluses and minuses of a high or low value. Products and services are provided by the ApplePie Capital family of companies which include ApplePie Capital Funding Solutions, LLC, and ApplePie Capital Inc. ApplePie Capital Funding Solutions, LLC brokers loans through its network of lenders; lenders independently determine loan availability and terms. The average range for cash flow multipliers is four to five times EBITDA.

You can explore our comprehensive franchise directory to find franchises that match your investment level. Personal assets include your possessions, such as the current market value of your home and automobiles, your furniture, electronic equipment, jewelry and any other personal items that have monetary value. Buying a franchise lets you skip over some of the early phases of business development, like creating a business plan, branding, and conducting product research. Instead, you can start your business with a market-tested product that is already familiar to your consumers. In fact, everything from in-store decor, signage, products offered, and the uniforms the employees wear is dictated by the franchise. For a person who likes to be creative, this can mean a bleak existence.

The key to making that calculation starts with something called the “financial performance representation,” or FPR. Moreover, growth within a territory can result in friction with existing franchisees. If the reduction is too great, the existing franchisee may go out of business.

In fact, it may believe its own performance will be stronger than the performance of the franchisee and may have avoided the FPR in order to be more conservative. For example, perhaps a given franchisor has a unique location or has been in business for decades serving one community where the brand has become iconic. Perhaps the franchisor is franchising only part of its current operation, based on the belief that the franchisee needs to start with a less complicated business . Obviously, the main reason most people buy franchises is to earn money, but no good franchisor would ever answer that question directly. A franchisor should instead provide you with some guidance to help you make that estimate for yourself.

Physical assets

Talking to these people may be the most reliable way to verify the franchisor’s claims. Visit or phone as many of them as possible to chat about their experiences. Some current franchisees may be reluctant to talk to you if they’re having problems. Item 20 provides charts showing growth and owner turnover in the franchisor’s system.

The last way to estimate revenue numbers is more direct — just ask. Even if the franchisor cannot answer your questions, others might. If you approach them about renting a space to house a marginally related business, they might give you an idea of how that franchisee is doing. Even from outside the unit, you can count the customers going in and make an estimate, based on the average prices, as to how much each one will spend. Multiply average daily expenditure estimates by the number of days the establishment is open, and voilà!

• Franchise Business Review provides data-driven solutions to help franchise companies improve and grow.
• ApplePie Capital does not condone or tolerate discrimination against any applicant on any prohibited basis under the Equal Credit Opportunity Act or any applicable state or local law.
• Does the franchisor have enough expertise to make you feel comfortable?
• Many people think that buying a franchise is a sure way to become a successful business owner, but in reality, there are a number of reasons why becoming a franchisee isn’t all it’s cracked up to be.

Search for franchise opportunities with the ultimate franchise finder App from Franchise.com. Ask to see the selection criteria and how many franchisors the broker has recently turned down. A broker who represents only a few franchisors will give you limited suggestions.

Using a Business Broker to Sell Your Franchise

We provide you with well-supported analyses and astute advice in our valuations of your businesses, business interests, assets, liabilities, and invested capital. Whether your business is a publicly traded corporation or privately held company, we find the solutions you need. A franchisor sells the right to use its brand and expertise to one who will open another branch of the business to sell the same products or services. According to a survey by Franchise Business Review, the average annual income of franchise owners is about $80,000.

You have to comprehend how the business works and all the intricacies of revenue, customer desires, and expectations. That’s something that the franchisor will give you through their training process. Let me point out that I’m referring to the EBITA profits, which attribute to the Earnings Before Interest, Taxes, Depreciation, and Amortization. Contrarywise this, the higher the volume, the higher the percentage.

This is why franchising is a popular option for individuals looking to own a business. If a franchisor claims that its franchisees earn an average income of $75,000 a year, that tells you very little about how individual franchises performed. Using an average figure may make a franchise system look more successful than it really is, because the high incomes of just a few very successful franchises can inflate the average for all franchisees. Look for the required disclosure of contact information for current franchisees and franchisees who have left the system during the franchisor’s last fiscal year.

Minute Sellability Assessment

But regardless of whether the franchisor supplies an FPR, your next job must be to develop an estimate of what you can expect to earn as a franchisee. This is your most important task before purchasing any franchise. The franchisor may historically have been understating its sales to the IRS to reduce its taxes, and now it cannot substantiate its actual levels of sales based on its own historical numbers. The franchisor may believe it will incur greater legal exposure by making an FPR .

Franchise owners that cannot or do not take the time to do so run the risk of losing money in the long run. Your formal contract is called the franchise agreement, and it’s a document you should review carefully. This is a binding document that lists your fees, obligations and more. We have been teaching business owners like you how to franchise a business for over 30 years. More importantly, Accurate Franchising, Inc. is the only franchise development consulting firm that actually owns and operates our own franchise brands . Starting in 1986 with a single Signarama store in Farmingdale, New York, our company has grown to 10 franchise brands with 1400 locations in over 80 countries.

Today’s digital landscape means limitless possibilities, and also complex security risks and threats. At ADP, security is integral to our products, our business processes and our infrastructure. A franchise lawyer and a business accountant are two critical partners you’ll need as you embark on your franchise journey.

What you should know about buying a franchise

Transworld Business Advisors are not only well-versed in all things regarding your business’s sales, but they also have tangible experience from numerous transactions. Their main goal, much like yours, is to sell your business at the best value for all parties involved. LegalZoom provides access to independent attorneys and self-service tools. Use of our products and services are governed by ourTerms of Use andPrivacy Policy. If money is tight, the long game of franchising could prove difficult to sustain.

With a variety of funding avenues and opportunities for mentorship, there has never been a better time to be a woman entrepreneur. Articles of organization are part of a form that makes your business official. Read more for tips on how to file LLC articles of organization in your state. LLCs and S corporations are different aspects of business operations, but are not mutually exclusive.

In order to maintain that partnership and the accounting equation to the franchise model, franchise owners are responsible for paying initial startup costs and ongoing franchise fees. These overhead costs and franchise fees are generally baked into the final total selling prices for products and services rendered. That profit is often what franchise owners will take home, or use to invest further into the business. Accurate Franchising consultants provide strategic planning, sales support/training, marketing, operations, legal, financing and real estate assistance – all designed to help business owners grow. To provide the personalized and time-intensive consultation required, Accurate Franchising currently limits the program to five clients at a time.

• That way, they have a replicable model that has been proven to work anywhere.”
• For example, the franchisor may have the right to offer the same goods or services in your sales area through its own website, catalogs, other retailers or competing outlets of a different company-owned franchise.
• Contact as many of the previous owners as possible to learn about their experience operating the outlet that failed.
• Keeping the above contextual points in mind, let us look at some key valuation guidelines.

The success of some franchisees doesn’t guarantee success for all. Item 2 identifies the executives of the franchise system and describes their experience. Pay attention to their general business backgrounds, their experience in managing a franchise system and how long they’ve been with the franchisor. Owning a franchise comes with defined costs, franchisor controls and contractual obligations. Location will also be relevant when comparing the value of other businesses on the market and those recently sold.