Whether you’re a franchisor looking to resell one of your existing properties, or a potential buyer who’s interested in the possibilities of franchise resales, there’s one thing you need to be informed about: valuation.
An accurate, transparent business valuation can help ensure franchisors make the right return on their investment. It can also give buyers the reassurance that they’re getting what they pay for. So how do you go about valuing a franchise?
What methods are there for franchise valuation?
There are three main methods for valuing any business. These are Seller’s Discretionary Earnings (SDE), Discounted Cashflow (DCF) and EBITDA Multiple. Let’s take a closer look.
Seller’s discretionary earnings (SDE)
This method takes net income, and then adds back the owner’s salary, any other discretionary expenses (those which aren’t essential to the business), as well as amortization and depreciation costs. SDE aims to account for all the expenses and cashflows within a business, thus giving a clear picture of its financial situation. It’s a method usually best suited for small and medium-sized businesses.
Discounted cashflow (DCF)
DCF valuation looks to the future, and examines a business’ projected cashflows over a period of time. It then subtracts the weighted average cost of capital (WACC) – the average percentage of its income which will be paid back as equity/debt, or to shareholders. This method aims to take into account the ‘time value’ of money.
EBITDA multiple
A company’s EBITDA (earnings before interest, taxes, depreciation and amortization) is calculated by taking its net income, then adding back the amount that was subtracted for interest, taxes, debt and amortization. EBITDA aims to represent the ‘underlying’ profitability of a company before expenses. This figure is then divided by Enterprise Value, which is calculated as market capitalization + total debt – cash and cash equivalents.
How do I value my franchise?
If you have access to the necessary information, you can use these valuation formulas to calculate a business’ value for yourself.
An easier option, however, is to find an expert who is familiar with valuation to give you a trusted opinion. A business broker or accountant can provide this service for you, but another option is to use a free, online valuation tool such as BusinessesForSale.com’s ValueRight. Tools such as this can provide a quick, accurate valuation with just a few key pieces of information about your franchise.
Why is valuing my franchise important?
Valuing a franchise resale properly means you’re guaranteed to get the return on it that your hard work and steady management have earned. Having a thorough understanding of the value of your venture also gives you the confidence you need at the negotiation table. It can help you sort the genuine, qualified offers from the prospective ones.
