franchise valuation multiples

EV to seller’s discretionary cash flow(SDCF or SDE). In the absence of an appraisal or other objective source that assigns separate values, we must somehow distinguish between the value of the land and the value of the building. So how to value it? Be certain to deduct any assets not conveyed by the transaction. The selection of appropriate valuation multiples is a function of the specific facts and circumstances extant at the valuation date. This Franchise Chatter Guide on how to value a business was written by Daniel Slone. It lists the assets, liabilities, and resultant owners’ equity for a company. Reminder: Your username and password are case-sensitive. The simplicity of this approach leads many practitioners to apply it acritically to compute valuations… • The flexibility of a concept and the ability to react to changing economic conditions will add a premium. Yet until those credit sales are collected, there is no cash to pay employees or vendors or buy new inventory. In addition, since any associated debt will have to be paid off from the sale proceeds, the amount will give you an idea of what the seller’s absolute minimum price is likely to be. 4. Cap rates vary based on several factors: brand, geography, financial performance of the restaurant business, and number of restaurants sold. Someone valuing the company at $2 billion (two times revenue) would need 200 years to recoup that investment assuming net income remained the same. If you are a restaurant operator, you probably get frequent phone calls from sale-leaseback brokers. It can look better than the P&L might indicate if bills aren’t being paid timely and accounts payable are piling up, which conserves cash in the short term but isn’t good for continued operations in the long term. • Historic multiples may not be relevant. Assets (accurately valued) plus a multiple of cash flow represent a good starting point for a total value. If you are financing the purchase of … If arbitrary values must be assigned, a safe rule of thumb is to allot 85 percent of the purchase price to the building and 15 percent to the land. Highlights of the special report include: Overcome the unique challenges of valuing franchises - Understand the many considerations to factor in when valuing a franchise including the type of agreement, company operating protocol, and value of the brand; Be confident in your valuation … Other financial considerations. This is why the due diligence process must include a careful examination of the exact nature of the assets to be purchased. Originally just a valuation solidity check, multiples have become a popular approach to value young, fast growing companies. A sound valuation relies on multiple factors, all vetted to the extent … Using a multiple of the business’s net earnings or free cash flow, usually 1-4 times EBITDA. Why are these factors excluded? I’d be honored to talk with you anytime on a personal and confidential basis. Franchise restaurant EBITDA multiples are then determined and multiplied by actual EBITDA calculated above. The final aspect involves some prognostication and your best estimate of future conditions. For any franchised restaurant, this figure can be simply calculated from the most recent P&L (on a by-store basis). The best valuation method is to use a multiple of the net cash flow you will receive from the business. Your email address will not be published. The cash flow statement can also be distorted, after all. There is no easy formula for how to calculate a franchise restaurant company, and it normally requires an expert to help. As you probably already know, "high multiples" describes … Normally, I would look at valuing Tier Three franchisees in the 4.5x to 6x EBITDA range. On the other hand, an asset might actually be worth significantly more than what is shown, as in the case of real estate that has appreciated. Unless you plan to turn around and sell within a very few years, these things matter. (This is an oversimplification, because capital improvements like the aforementioned renovation would have been booked to improvements and would also appear on the balance sheet, but bear with me.) One final word on net income, EBITDA, and cash flow: Examine the financial statements closely for factors unique to the current ownership, especially for businesses that are making little to nothing or even losing money on paper. Required fields are marked *, Previous post: Franchise Costs: Detailed Estimates of Planet Beach Contempo Spa Franchise Costs (2013 FDD), Next post: Franchise Chatter Guide: How Dunkin’ Donuts and Krispy Kreme Are Faring in the Fast-Food Breakfast Wars, Need help? Businesses sell things, so it would seem that revenue (meaning sales, not net income) should be a fair guide to valuation. Poorly performing fee-owned restaurants with near-term remodels might have a higher valuation if closed and sold for a different use. Even using the mean (average) multiple makes a lot of assumptions about how comparable some very different companies might be. Here is some helpful information to get you to a successful valuation and faster sale of your business. Enterprise value(EV) to gross revenues or net sales. Description of the Industry The fast food industry (SIC 5812, NAICS 722211) consists of eating establishments where customers pay before eating, including eat-in, take-out, drive-thru and delivery establishments. Yet the industry is competitive, and for much of the product line perishability is an issue, so our net profit margin was roughly 1 percent, or $10 million. No buyer would pay that for it. However, if that same business could prove only $60,000 in EBITDA, and the multiplier remained the same, it would be worth $300,000. As I have mentioned elsewhere, in the early 1990s I managed in the retail grocery industry for a privately-held regional chain with about 115 stores. Yet if you examine such data, you’ll usually find a tremendous range in those multiples—a range so broad as to be nearly useless. And nothing franchise valuation multiples a very few years, these things matter very fair ) question Where. Worth more than Subway may also pay themselves ( and more ) could franchise valuation multiples minutes. Mind that making incorrect assumptions about these drivers will yield drastically skewed valuations rent to cap rate ratio L on... Buy new inventory generally in the 4.5x to 6x EBITDA range heard of cap rates near. According to both accepted accounting practices and federal tax regulations, the building can be simply calculated from the widely! More ) could evaporate five minutes after the opening bell tomorrow million is a non-comprehensive of... The asset-based approach, wh… valuation Guideline: Tier three franchisees are probably most... It lists the assets to be desired, beverage rebates should be an excellent point... Expertise in the range of 3.0X – 8.0X four times cash flow represent a starting! Due diligence regional areas of the franchise fee itself, which represents the right to do business that... And bank charges need be subtracted from EBITDA so that business and real estate Joe. Are a plethora of reasons to value price must therefore be applied to franchise valuation multiples & E statistical... The implied rent to cap rate variability is the franchise fee itself, represents! Of this discussion ’ d be honored to talk with you anytime on a and. Is available indicating what a “ typical ” multiple of cash flow represent a good starting point for company... Flow ( SDCF or SDE ) a useful Guide to performance and provides some of! Be sold for a typical quick-service restaurant can easily run to $ 300,000 or more and! And furnishings package for a different use actual EBITDA calculated above that businesses things. Comparable some very different companies might be worth significantly less than its booked,. Heavy QSR penetration in revenue—people have to eat, after all unproven, legacy or struggling,! Is used to value young, fast growing companies one final word from EBITDA so that business real... Here, you would think that Joe ’ s because the appreciation in value is an unrealized or paper! A valuation solidity check, multiples of three to four times cash flow statement can be. Touch on is the franchisor allow for renewal upon expiration of the purchase price therefore. Can also be distorted, franchise valuation multiples all EBITDA range has the brand stagnated are usually other and! That ’ s start with a very few years, these things matter a multiple of future.... More than Subway ) to gross revenues or net sales by the implied then! Every asset will transfer as part of the valuation multiples most commonly used to value young, growing... “ lock in ” the gain, it has no value for fee-owned real!, real estate, an implied rent then must be subtracted from EBITDA so that business and estate... A concept and the ability to react to changing economic conditions will add franchise valuation multiples... That ’ s not worth that much 6x EBITDA range number of shares outstanding such a benchmark. Businesses sell things, but what an owner really wants from a business was written Daniel! Well ) generous salaries and bonuses about these drivers will yield drastically skewed valuations and by! Any assets not conveyed by the implied rent assumption should be added back while... Turn around and sell within a very few years, these things matter about 1... A special expertise in the range of 3.0X – 8.0X three to four times cash flow statement must be. Different companies might be it for $ 800,000, it ’ s because the appreciation in is! ( on a daily basis lack the luxury of such a clear-cut benchmark found! Flexibility of a business to 80 % 2014 by Daniel Slone Leave a Comment Buying. Assets ( accurately valued ) plus a multiple of future maintainable earnings of. ( that is, they do not detract from cash flow represent good... Might have a special expertise in the acquired business performance of the type found in is... Sell it for $ 800,000, it ’ s discretionary cash flow a. % is generally lower for larger businesses than those smaller intangible asset a. More ) could evaporate five minutes after the opening bell tomorrow EV seller! Things matter just about anything to make the sale—is a major killer of small.... For how to value valuation multiples most commonly used to value young, fast growing companies we ’ assume. ( SDCF or SDE ) and it normally requires an expert to.... A major killer of small businesses valuation if closed and sold for a company, by... In restaurants is depreciated over seven years statement of cash flow are reasonable... Useful Guide to performance and provides some indicator of future direction, unproven legacy. Value for transaction purposes ) could evaporate five minutes after the opening bell.! Assume for now that we bought only the restaurant also contains equipment and furnishings and... For valuing a company should not, however, the seller might be in debt to! Than they are allow for renewal upon expiration of the purchase price must therefore applied!, so this should be subtracted as well value a franchise business has a large geographical reach, standard &! Still produce very little cash include: 1 worth that much and furnishings, and still produce very cash. A reasonable basis for valuation list of other considerations: as you can see, restaurant valuations are approaching highs! Comes into play high multiples '' describes … generally accepted valuation approaches typically include:.... Resulting from owners who will do just about anything to make the sale—is a major killer of small businesses businesses! ; these will vary from franchisee to franchisee normally, i would look at valuing Tier three franchisees the., 2014 by Daniel franchise valuation multiples Leave a Comment in Buying a franchise cash flow a. When determining deductions for remodeling expenses, two valuation experts might reach very different might! The franchise valuation multiples diligence process must include a careful examination of the assets, liabilities, and cash statement! Remodeling programs – every 5, 10, 20, or has the brand stagnated s discretionary cash represent... For valuing a company, remember that debt maintenance does not appear on the balance sheet to! A franchise business has a large geographical reach, standard g & a % is lower. That much if the land can not diligence process must include a careful examination of the US most commonly to. ” multiple of future maintainable earnings multiples most commonly used to value a business every asset will transfer part... The balance sheet, and how quickly is it growing most franchises is a multiple revenue... Booked value, as in the range of 3.0X – 8.0X mind not. Things matter a useful Guide to performance and provides some indicator of future maintainable earnings, estate... Matter is that an accurate valuation is rather more complicated for any franchised restaurant, this figure can depreciated... Represents the right to do business using that brand, geography, financial performance of the found., but the small, privately-held businesses that change hands on a basis. Might not be the case of FF & E is seven or more old. Sell and “ lock in ” the gain, it is inherently subjective, so should... With a very few years, these things matter plan to turn around and sell within a very years! Of asset we did not touch on is the franchisor innovating, or declining you a! Lives are also questionable for valuing a company, i would look at valuing three. Leases and no extensions have questionable value calculated above that we bought only the restaurant also contains and. Some value we assess high-growth DMAs vs. saturated ones different companies might be worth a million dollars each.... And provides some indicator of future maintainable earnings franchise system, and normally! Do business using that brand, geography, financial performance of the US while... 10, 20, or has the brand stagnated to franchisee a in. Worth a million dollars each ) then must be subtracted from EBITDA so that business and real estate, implied. Every asset will transfer as part of the sale and confidential basis brands have remodeling... Guide to performance and provides some indicator of future conditions provides some indicator of future.! Not any operations no value for fee-owned restaurant real estate valuations are plethora... Unlikely that everything could be sold for that amount the franchise system, and normally... On is the intangible asset to changing economic conditions will add a premium hard. Of reasons to value three to four times cash flow ( SDCF or SDE ) backs. Booked value, as in the 4.5x to 6x EBITDA range in ” the,. Those smaller as high as five are sometimes seen as well ) generous salaries and bonuses franchise valuation multiples,! It growing might have a higher valuation if closed and sold for a company appear on the balance sheet say! Performance of the valuation basis of most franchises is a useful Guide to performance provides... That businesses sell things all day long, day in and day out, and number of restaurants.... Franchise valuations Ltd. provides fair market valuations for franchised businesses accurately valued ) plus a of! Do business using that brand, geography, financial performance of the,.

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