How To Value A Franchise Business

If you own a franchise business, whether that be a cafe, coffee shop chain, or fast-food outlet, understanding how to value your business is crucial, especially when considering selling, expanding, or seeking investment. Franchise businesses have unique characteristics that differentiate them from independent operations, which means their valuation requires careful thought and a tailored approach. Keep reading to learn all about valuing your franchise business, including methods, common mistakes, and more.

Key factors influencing franchise business value

There are several key factors that may influence the value of your franchise business. We have detailed these below for your convenience:

Brand strength

The strength of the brand plays a significant role in a franchise business’s value. Well-known brands with a strong reputation in the market often attract higher valuations thanks to their established customer base, marketing support, and operational systems. Buyers are more likely to pay a premium price for a business associated with a respected brand name.

Location and foot traffic

The location of your franchise business is often critical, especially when dealing with industries like hospitality and retail. A franchise located in high-traffic areas, like shopping centres or business districts, is more likely to command a higher valuation thanks to more visibility and customer volume. Other things that might influence your valuation include parking, accessibility, and the businesses around you.

Lease terms

Business leases can vary in quality, and this can affect your market value. A long, secure lease with favourable terms, such as renewal options and capped rent increases, is often attractive to potential buyers. On the other hand, a short lease or restrictive conditions might deter buyers or lower the business’s value.

Financial performance

The profitability of your franchise is a primary driver of its value, and key financial metrics are almost always closely looked at during a valuation. These include things like your revenue, gross profit, net profit, and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation). Consistent growth that can be tracked through these metrics will increase your valuation, while declining or unpredictable metrics can reduce it.

Franchise agreement conditions

The terms of your franchise agreement, including the remaining duration, transferability, and associated fees, can impact your valuation. Buyers typically look for and are much more interested in businesses with long, secure agreements and reasonable ongoing fees. Complex or restrictive agreements might lower the appeal to buyers and investors.

Market demand and industry trends

Current market conditions, consumer preferences, and broader economic factors can often influence business value. For example, cafes offering specialty coffee and plant-based options might see increased demand in areas where these trends are rising (think big cities and younger populations). Staying ahead of industry developments can help sustain or boost value.

Valuation methods specific to franchise businesses

There are multiple methods of valuing a business that you can choose to use, each with its own set of advantages and disadvantages. Some may appeal to certain investors or sellers more, so it’s important to consider the valuation method carefully. Here are four options ideal for franchise businesses:

Multiple of earnings (EBITDA) method

The EBITDA method involves applying a multiple to the business’s earnings before interest, taxes, depreciation, and amortisation. The multiple used depends on lots of factors like the strength of your brand, financial management and performance, location, and market conditions. For example, a well-performing cafe franchise in a prime location might be valued at 2 to 4 times its EBITDA.

This method reflects the business’s profitability and operational performance and works well when comparing similar businesses. However, it doesn’t consider future growth potential, and it can be influenced by accounting policies or one-off expenses.

Revenue multiple approach

The revenue multiple method values your franchise business based on a multiple of its total revenue. This approach is common in hospitality and retail businesses, and it’s typically used when profits fluctuate or detailed financial records aren’t available. Multiples used are often lower than those for EBITDA and depend on industry benchmarks and business specifics.

The benefits of this method are that it’s simple and easy to follow, as well as being useful for benchmarking similar businesses to yours. However, the revenue multiple approach ignores profitability and might not reflect operational efficiency or your market position.

Discounted Cash Flow (DCF) method

The DCF method works by projecting future cash flows and discounting them back to their present value using an appropriate discount rate. This method takes anticipated growth potential, inflation, and business risk into account, giving a detailed picture of the business’s potential future value. Many buyers and investors will appreciate getting to see the bigger picture like this!

This method considers future earnings and investment risks, and it’s highly customisable based on business-specific forecasts. However, it’s also complex and time-consuming, and can be sensitive to assumptions. Inaccurate forecasts can skew the results.

Net profit approach

You can also use your net profit, which is your actual profit after working expenses have been paid, to value your business. This method is one of the most straightforward, as all you need to do is apply a multiple to your net profit, which is typically adjusted for one-off costs or owners’ benefits. It’s often best used for small to medium-sized businesses with consistent earnings.

The net profit approach is simple and intuitive, and reflects the bottom-line profitability so your investors can see exactly what you’re offering. However, it doesn’t account for capital investments or non-cash expenses, and it might not suit businesses whose profits vary from month to month.

Common mistakes when valuing franchise businesses

Valuing a business is a complex task, and there are several mistakes that owners make. Below, we’ve outlined some of the most common mistakes:

Overestimating the value of your business

Some business owners make the mistake of overvaluing their businesses based on emotional attachment, personal effort, or unrealistic market expectations. Your valuation should be grounded in financial performance, market data, and independent appraisal, rather than your personal feelings or sentiment. This is one of the main reasons why business owners choose to use a professional broker with no emotional attachment to the franchise business.

Relying on outdated financial reporting

Using incomplete or outdated financial records can result in inaccurate valuations, which is another common mistake that business owners are liable to make. Always make sure that your profit and loss statements, balance sheets, and tax records are up to date and professionally prepared to avoid similar issues. Reliable records will improve buyer confidence and support a higher valuation, so it’s essential that you keep your reports fresh.

Overlooking operational dependencies

Some franchise businesses heavily depend on specific staff, suppliers, or customers. If a business’s success hinges on one barista, supplier, or corporate client, its value could decline. After all, all it takes is for the relationship to be jeopardised to potentially bring the entire business down – and that sounds like a big risk for new buyers or investors. A diversified, resilient operation is more valuable and a safer bet overall, so don’t overlook your dependencies and work to distance yourself from them wherever possible.

Enhancing your franchise business’s valuation

If you’re looking to boost the value of your franchise business before selling or seeking investment, consider our tried and true tips below:

• Improve your financial record-keeping: By maintaining accurate, up-to-date accounts, you can make it easier to value your business accurately and efficiently.
• Optimise profitability: Optimise cost control, upselling strategies, and menu engineering to boost your profits and value by association.
• Negotiate favourable lease terms: Long-term premises stability appeals to buyers and investors, increasing your business’s valuation and asking price.
• Enhance customer experience: The better the experience, the more likely your customers will keep coming back, so utilise quality service, loyalty programs, and online engagement to boost valuation.
• Diversify your customer base: You don’t want to become dependent on certain customers, so diversifying can make you appeal more to buyers.
• Streamline operations: Train your staff cohesively and use the same documenting systems to make your business as easy as possible for investors to understand, boosting their interest in it.
• Invest in marketing and branding: This will increase visibility and customer loyalty, which can encourage growth to increase your business valuation.
• Stay ahead of industry trends: Offer new products and embrace sustainable practices to stay ahead of trends, utilise market research often, and know your target demographic to organically grow your franchise business.
• Strengthen relationships with suppliers and franchisers: The better your relationship with your suppliers and franchisers, the more trust your investors will have in the business, hopefully spurring them to spend more.

FAQs

How do I find out the market value of my franchise business?

A business valuation expert or broker can assess your business’s financial performance, market position, and operational risks to determine an appropriate value. While you can do this yourself, it’s often more difficult than many anticipate, and you need lots of documents to complete it accurately. There are several methods you can use to find the market value of your franchise, so it’s up to you and your potential buyers as to which you choose.

What multiple should I apply to my franchise’s EBITDA?

The multiples you use for valuing a business vary based on factors like location, profitability, lease terms, and brand strength. A typical range for franchises in Australia is 2-4 times EBITDA, but this can be lower or higher depending on your specific business. Likewise, the term ‘franchise business’ can relate to a number of different types of businesses within retail and hospitality, so your multiple might differ depending on the niche of your business.

Can I value my franchise on revenue alone?

While revenue multiples are sometimes used, especially in retail and hospitality, they don’t consider profitability or operational costs. This makes them less accurate, and less helpful for investors and buyers to get a good view of the business. EBITDA or net profit approaches are usually more reliable for small to medium-sized franchise businesses.

What records do I need for a valuation?

Up-to-date financial statements, tax returns, lease agreements, franchise agreements, employee contracts, and asset lists are essential for an accurate valuation. When working with a trusted broker, we will give you a list of everything you need to provide us with to help us value your business properly.

Get in touch with a business valuation expert near you

Valuing a franchise business can be more difficult than originally thought, so if you’re not confident in the way it works or are unsure about anything, it can be beneficial to enlist the help of an experienced broker. Business valuation experts are ready to assist you in determining your franchise business’s market value. Whether you’re planning to sell, expand, or refinance, professional advice makes sure you make informed, confident decisions that are right for you.

We have business valuation experts across Australia, and you can get in touch with them by following the details below:

• Get in touch with our business valuation experts in Brisbane
• Get in touch with our business valuation experts in Sydney
• Get in touch with our business valuation experts in Melbourne
• Get in touch with our business valuation experts in Perth
• Get in touch with our business valuation experts in Adelaide
• Get in touch with our business valuation experts on the Gold Coast
• Get in touch with our business valuation experts on the Sunshine Coast