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How to Value a Franchise

Determining what a franchise opportunity is worth can be a bit confusing. There are many components to franchise valuation and to determine the value of a franchise, a variety of factors need to be taken into account.  Looking at the books cannot give you the whole picture of the worth of a company.  In order to conduct a proper franchise valuation, a company must look at a number of different elements.

Elements of Franchise Valuation
The economy of the nation, region, and city or state is reviewed during a franchise valuation.  A painstaking evaluation is also done of the company’s financial state.  Financial records of the company are then normalized for a more accurate picture of the franchise’ value.  The final part of a franchise valuation will also take into account the size of the market, the value of the competition, and future trends related to the franchise.

Franchise Valuation Methods
The 3 main techniques used for franchise valuation are evaluating the income and fair market value of the company, reviewing the actual assets of the company, and comparing the company to similar franchisees in the same market.

Income Method
Different income approaches include the capitalization of earning or cash flows and the discounted future cash flows (“DCF”).  This method may be combined with the asset approach tin order to figure out a franchise’ excess earnings.

Franchise Valuation through a Review of Assets
This approach determines the sum of the parts of the franchise in order to value the entire franchise.  Fair market value is often utilized in order to properly adjust the assumed worth of the different components of the franchise.  This method does not take into account a company’s intangible assets like goodwill, customer loyalty, and reputation.  Consequently, the assets review method of franchise valuation is generally only used for liquidation proceedings.

Business Valuation through Market Comparison
A review of supply and demand within the market of a company is used for franchise valuation with the market method.  The worth of a franchise as a whole can fluctuate according to the rise and fall of either supply or demand in the industry.  The market method is like comparing recently sold comparable real estate when selling homes and other properties. The market methodology to franchise valuation uses the reported info from public companies or from actual similar transactions.

Banks may be able to assist individuals in the specifics of franchise valuation and can often answer questions.

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