Considering a franchise resale? Read our guide on how to determine the value of a business to make sure you get the best price, whether your unit is struggling or smashing its targets.
Deciding to sell your franchise business is a big step, and one that takes a lot of courage. The prospect of valuing your unit can be daunting, especially if it’s not making a profit, but there are plenty of resources to help you. Here, we’ll take you through how to find the value of your franchise business, no matter your situation.
How to value a successful franchise
Firstly, let’s run through how to complete a franchise valuation when your business is performing well.
- Use your financial statements to determine the net cash flow. To get to this figure, deduct business-related expenses from the profit generated.
- Multiply the net cash flow. The number of times it should be multiplied depends on a couple of factors, including the stability of the business’s cash flow and the forecasted business growth. To give you an idea, a profitable business is usually valued at between two and five times the net cash flow.
- Provide details of how you've reached your price. A buyer will want to check the business is a good investment and make sure its price reflects its potential profitability.
- Franchise resale valuations are never exact and the franchisor may have different expectations for the business, so the next step in the process is negotiation. At this stage, any gaps in the valuation can be closed through discussions with potential buyers.
- We always recommend you consult an independent franchise specialist for advice. You might choose to discuss the resale with an accountant or lawyer with experience in the franchise industry. They’ll be impartial and able to offer support during the negotiation discussions.
How to value an unsuccessful franchise
If you’re wondering how to value a failing franchise, the process is a little more complicated, and there are several ways you can reach your figure. The good news is, your unit may be more valuable than you realise; having good contracts, high-quality equipment or other similar assets can bump up the price of a business.
Here are some of the ways you can find the value of your franchise unit if it’s struggling:
- Use the multiplied cash flow method to estimate the business’s future income. As your business is currently unprofitable, you’ll need to apply a significant discount to the end price.
- Rather than multiplying the net cash flow, try multiplying your sales. This method is useful if your business has faced temporary issues but you expect it to reach average industry profit levels again in the future. If you’ve just had a tough year, add a 15 percent discount to your figure. For a unit with issues spanning several years, you could lower the price by 50 percent. Do some research on your industry and find out what other struggling businesses have sold for.
- Estimate the business’s liquidation value. Don’t forget to account for the time, energy and money someone would need to spend when liquidating the franchise unit.
Regardless of the franchise valuation method you use, you’ll still need to complete the final steps; showing how you reached your price, negotiating and consulting an expert.
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Things to bear in mind when valuing a franchise business
Whatever price you get for your franchise resale, it’ll probably be significantly higher than the cost of a brand new unit. You can justify this additional expense as the business is already up and running and is likely to have existing customers and contracts. As a result, the new buyer will be able to make a profit almost immediately - and they’ll be willing to pay a premium for that luxury.
The most complicated part of a franchise resale is valuing it - or determining whether you’re paying a good price for it, if you’re the buyer. However, we strongly recommend you seek expert support from experienced franchise professionals. They’ll be able to tell you whether the suggested price is an accurate reflection of the business on offer and advise you on future steps.
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- Mythbusters: Common Misconceptions About What Makes a Successful Franchisee
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How to get the best price for your franchise resale
Everyone wants to get as much money as possible from their franchise resale. With a bit of careful planning, you can boost your asking price, so here are a few things to bear in mind:
- Don’t sell your franchise business during a time of economic uncertainty. It’s unlikely your unit will be performing as well as it could, so wait until the market is more stable and buyers are less reluctant to spend their hard-earned cash.
- Sell when your business is performing well. Although you might be most tempted to sell up when you’re struggling to turn a profit, you’ll get more for it if you can build the business back up. Buyers will be more attracted to a business doing well, as it will show them what they could achieve if they bought it.
- Spread the word. Your franchisor may be able to find a buyer for your business, or acquire the unit themselves, but if not, you’ll need to market your opportunity. The more people who consider taking on your business, the more profit you could make.
Learn more about franchise resales
It’s normal to feel intimidated by the franchise valuation process, but there is lots of information out there to support you as you sell your business. To find out more about how to manage your franchise resale, see our other guides:
Alternatively, browse our entire selection of articles on all aspects of running your own business, from funding your venture to planning for retirement.
Alice Tuffery, Point Franchise ©