There are several models used to determine franchise value. It all begins with looking at the franchise’s financial statements. Examples of factors to look at include cash flow and revenue. However, a common method is the EBITDA way, which is an acronym for earnings before interest, taxes, depreciation and amortisation. Once EBITDA is calculated, it’s important to note that the franchise value is often four to five times greater than this value, so a franchise business valued at 100,000 through EBITDA will actually have a market value of 500,000. Another method is based on future income, which is also known as the seller’s discretionary earnings (SDE). Through the SDE method, pre-tax and pre-interest earnings are added to vehicles, travel and other transactions, which are listed as business expenses.
In order to increase your franchise’s value, you need to ensure your operations and processes are as streamlined and efficient as possible. This means investing in the right team, technology, equipment and suppliers to ensure that your business earns more and can therefore be valued at a higher amount.
Some of the factors that can negatively impact a franchise’s value include restrictive trade clauses that prohibit a franchisee from reselling or transferring their business to a new owner. Other factors include the payment of a transfer fee or the need to refurbish facilities. Finally, there is the right of first refusal.
Franchise value is important for franchisees because it helps them gauge how well the franchise business is performing (historically, currently, and in the future) to help them reach an informed decision when investing in a franchise unit.
The value of a franchise opportunity can be studied by exploring aspects of the parent franchise business that include but are not limited to:
Franchise value is the value of the business as a whole expressed in monetary terms. The initial franchise fee to purchase a franchise is a monetary amount that the franchisee pays to the franchisor for access and rights to use the franchise brand, assets and intellectual property (among other things). Therefore, while the former is used to determine the value of the business for investment purposes, the latter is the amount paid for the rights to become a “member” of the franchise.
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