Determining the value of your business is an important first step in starting the process to franchising. Alternatively, if you’d like to sell your existing franchise business or you’ve got a franchise unit for sale, you need to know how to value a business so that you get the best price for it.
While there are many financial factors to consider when you’re looking at how to find out how much a company is worth, in this article, we’ve tried to simplify the process to make things easier for you. With this in mind, let’s take a look at how to value a business for sale in terms of franchising.
Table of contents:
The different factors involved in determining a franchise’s value
As mentioned above, there are many factors to consider when valuing a franchise business. However, there are some important criteria for doing so and in this section, that’s exactly what we will look at. So, without further ado, here are the different factors to determine your franchise’s value.
The value of your brand (intangible asset)
Although the value of a brand is difficult to calculate quantitatively, it’s an essential asset that ensures your franchise brand is top of mind for consumers and prospective franchisees. It involves not only your licences and trademarks, it’s also about your industry reputation that leads to sales.
A predictable business model (intangible asset)
One of the things that sets franchisors apart from independent start-ups is the predictability of their business model. These business models are often tried and tested and proven to work in times of recession or an economic upturn.
The value of your franchise’s training and purchasing power (intangible asset)
In franchising, training is an essential part of the business’ success. It ensures uniformity and consistency in terms of what products and/or services customers get. The levels of training and support add value to a business, too, as does its purchasing power in terms of being able to secure discounts from suppliers for the entire franchisee network.
The different ways to determine a franchise’s value
Of course, a franchise business has both tangible and intangible assets. But how is their value determined? Here are a few important methods to help you identify the value of your franchise.
The book value of your business
The book value of a business is generally the value of your assets as shown on your financial statements. However, there are both tangible and intangible assets to consider. With the tangible ones, you need to factor in depreciation and sometimes, for service-based franchise businesses, this value will be quite low because the value of your business is measured in terms of services offered and is not based on heavy equipment or machinery that you are selling with a high value. Also worth considering is whether you have movable and immovable assets and what each one is valued at. The book value of a business is one way of determining business value, but it should not be considered a full and accurate representation of the value of your franchise.
The sale price of similar businesses
Looking at comparable businesses and what their sales price is can also help you determine whether what you are asking for the sale of your franchise is worth it. In many cases, there are similar businesses that you can compare with the help of business brokers. However, not all businesses have a company they can be compared with, so this method also has its flaws.
The value of income generated
Although many business owners try to push the value of their income down for tax benefits, converting this into a business expense, it’s also possible that the reality of valuing your franchise business in terms of income generated may also yield skewed results.
Other factors to consider
Additional factors, other than the ones mentioned above that should be considered when valuing a franchise business include economic conditions and the time value of money. The value and loyalty of your customer base is another important consideration, as are industry opportunities and threats, the terms and conditions of your franchise agreement (duration, fees, royalties, renewal options, etc.).
The steps involved in valuing a franchise business: How it’s done
And finally, with different factors and methods to consider in terms of valuing your franchise business, there are some steps to follow as well. Here are three steps to consider when valuing your business.
Step 1: Look at past performance based on previous financial statements
In order to look at the present moment or the future in terms of how much cash a business will generate, we need to study how the business has performed in the past. To calculate cash flow, you can use the unlevered cash flow approach, often used for larger deals. For smaller deals, levered cash flow is used to provide a snapshot of what new owners will receive after the debt holders receive their interest expense.
Step 2: Determine and discount the future free cash flow
In this step, franchise business owners try to determine how much cash will be left over each year after all the expenses have been considered. This cash is the cash that’s returned to the owner without affecting the business. Make sure that when you calculate future free cash flow, that you do so for a period of five to 10 years ahead.
Step 3: Assign a terminal value
Once you’ve chosen a period of time over which to project cash flow, you need to assign a “terminal value”, which represents the cash flow that the business is expected to reach after the projected period. One way to do this is through the “perpetuity growth” method, which assumes that cash flow will grow indefinitely at a certain rate. The second way to do this is to use the “earnings multiple” method, which assumes that the business will exit at the end of the projected period. Although there are other methods, such as the “future liquidation” method.
Final remarks
If you are looking to save your business or give it a second chance, then speaking to a professional is highly encouraged. This is where we at Franchise Fame come to the fore with our detailed franchise portal, franchise marketing services and a whole lot more to ensure your business sale’s success.
As consumers become more environmentally conscious, are green and eco-friendly franchises simply capitalizing on a current trend, or are they positioning themselves as the leaders in a sustainable future for the franchising industry?
Thank you for this great great question that touches on an important topic for both franchise businesses and consumers. What we would like to believe is that while some franchises may be capitalizing on the trend, those that are authentically committed to sustainability are likely to emerge as industry leaders. They are not only positioning themselves to benefit from current demand but are also future-proofing their operations against evolving regulatory and market conditions.