How Much Is Your Franchise Actually Worth?
Written by Ben Robinson
Position
What are you using LinkedIn for? Seeking jobs or expanding business networking? LinkedIn is one of the biggest business networking and social media platforms that helped millions of people reach their business goals. But what about you? Have you been able to use LinkedIn to the maximum? Keep reading to get some LinkedIn tips for both opportunities seekers and business owners.
RELATED: How To Develop A Branding Strategy For Your Business
How Can I Increase My Franchise Value?
Note that you should spend years looking for the best buyers and deals even after deciding to sell your franchise property. Hence, you have a long time to implement the valuation-raising tips below.
Renew Leases
One of the first things a buyer looks at when acquiring a franchise location is the lease’s remaining term for the business. If they are going to have to renew the lease themselves sometime in the near future, that is an immediate red flag and can quickly derail the whole deal.
If you are preparing to meet potential buyers about acquiring your franchise location, ew-up the lease to make the property look much more attractive.
Settle Up
Outstanding deals that might incur additional costs or loss of reputation make a sale basically impossible, so make sure everything is tied up. For example:
- Debts – All of your franchise’s unpaid taxes and other debts need to be paid off because it’s your duty to disclose them during the sale if they’re not.
- Legal Proceedings – If your company is entangled in legal proceedings of any type, make sure investors never find out about them. That means resolving them and dealing with any residual effects before you begin the sale.
Allow Room for Growth
Buyers are more interested in businesses that have space to grow. That means that if your business has just enough employees and infrastructure to support it, you should consider hiring more than you need before the sale. The knowledge that a business has room to thrive and grow looks great to buyers.
Expand Your Target Demographic
The broader your appeal, the higher your franchise value will be estimated at the time of sale. So if your franchise only appeals to a narrow niche, try broadening your demographic focus a bit before the sale.
RELATED: How to Make Clients Line Up and Beg You to Serve Them
How Should I Calculate My Franchise Value?
Things are quite different in LinkedIn for business owners since you try to reach more viewers, customers, and maybe investors. So how to get there? Here are some useful LinkedIn tips for you.
Calculate EBITDA
A good first step is calculating EBITDA, or “earnings before interest, tax, depreciation, and amortization.” EBITDA is a measure of your location’s profits before secondary expenses like accounting decisions cut into them.
The 5x Rule
To calculate the value of a franchise that has been stable in its EBITDA for the past few years, you can simply take the figure and multiply it by the number of years you think the business will still be around.
Sure, you might argue that the business will become more profitable once it is sold, so you are getting a raw deal by going on current trends. But the thing is, the money you are paid now is inherently more valuable than money obtained later. That is because you can gain interest on the money you get today.
The Multiplier Rule
Another method of determining a franchise’s value that is usually applied to franchises that are still growing is to take its current yearly EBITDA and multiply it by a “risk factor” determined based on the perceived longevity of the business based on the environment around it.
If a franchise is dealing at an extremely at-risk business space, for instance, the risk factor might only be two or three. If it’s not a risky business, the multiplier might be closer to 10. An average, however, is a multiplier of five. That means a business with an EBITDA of $200,000 per year would be valued at $1,000,000, assuming a ten risk factor.
Here’s some more info about calculating risk factor for your franchise.
What Else Should I Keep In Mind?
Be Honest with Your Valuation
DO NOT inflate your evaluation to suit your needs.
For instance, it might be tempting to set a number that corresponds with a loan you have to pay off or a mortgage you need to refinance. Avoid that temptation and stick to the formulas, because figures not backed up by reasonable calculations will sour buyers on you as a seller.
Consider Franchising Rights
Remember that your franchise is only licensed to use your mother company’s brand for a certain time. Your buyers will almost certainly check that time is not going to expire anytime soon, so do your due diligence by ensuring they’ll be happy with what they see.
Consider Franchising Rights
After you calculate the franchise value you think is fair, reference other properties that have been sold in your same franchise system and make sure the prices are somewhat similar. Remember to look up other locations that fall in the same ballpark as yours in terms of success and revenues.
Selling a franchise location is not something to be taken lightly, but it’s actually pretty easy to calculate an excellent asking price if you know what you’re doing. Hopefully, with this short guide, you can get a general idea of what needs to be done.
If you’re determining your franchise value, let me know how it’s going on the Bookkeepers Facebook! Do you have any tips not mentioned here for raising the valuation?
UP NEXT:
