Business Valuation

Franchise Operations

If you are a franchise owner and considering growing through acquisition or thinking about selling, you have come to the right place. I have a working knowledge of the Distributed Ownership Model (Concept <->Business Enterprise <->Real Property) to make your transactions the most profitable and cost effective. Extensive experience with companies like Arby's Restaurant Group writing business valuation proposals for Executive Steering Committee members is the foundation from which I entered this area. 

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To elaborate, there are 3 primary asset classes in the Franchise Industry (concept, business enterprise, and real estate). Each can have their own investor (s) or a company may choose to own 2 or all 3. Typically, however, you will have a Franchisor, Franchisee, and Landlord.

  • Franchisor – owns the concept and receives royalty as compensation
  • Franchisee – owns the business and pays royalty for using concept and rent for using real property
  • Landlord – own real property and receives rent as compensation

There are 2 components to valuing a franchise. In this example, let’s say were looking at a restaurant.

  1. Business Value –multiple of EBITDA adjusting for such things as:
    • An implied market rent deduction for fee units – eliminating beneficial arrangements
    • Eliminating non-recurring and extraordinary expenses from P&L
    • Franchisor G&A allocation
    • Franchisee Royalties that do not meet general licensing levels for franchisor (i.e., favorable franchise agreements)
    • Capital Expenditures (e.g., a required remodel) and associated revenue enhancements
  2. Real Estate Value – land and building calculated using:
    • Market based rent
    • Market Capitalization rate
    • Comparable properties sold

Note: Business Value can be further examined by looking at historical P&L’s in the economic analysis and using a Build-Up Method to determine capitalization rate or multiple of EBITDA. These factors are inherent in the Income Method of Valuation and build upon market equity rates of return w/ premium for things like company size and risk. The Build-Up Method can also be used to calculate the appropriate discount rate when using Discounted Cash Flow as opposed to capitalized income/EBITDA. The income methods can also be supported by the Market Approach which compares multiples of recent transactions.

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