How Does One Value an Existing Franchise Business?

How do you really know the value of an existing franchise business? Some visible factors, such as volume of business, number of locations in a particular or region, and other things may be easy to see, while others may not be as apparent.

You can ask yourself these and other questions you may have as you attempt to value an existing franchise.

Is it apparent that the franchise’s revenue base is satisfactory, or do simple things such as the franchise’s overall physical appearance, inventory (both amount and appearance) give the impression, whether true or not, that there may be trouble?

If visible or apparent clues give you reason for concern, you may want to check the latest Franchise Disclosure Document (FDD) or other records which are available for inspection.

How is it making its money?
Is the franchise buying low and selling high, or buying high and selling low? Either of these can be a good indicator of the franchise’s value.

Support from the master franchise, if there is one, is another good sign. Ask yourself if the support is being given to ensure success or to keep the franchise operating so as to avoid compromising the overall franchise profits.

If the franchise already has a good reputation, ask yourself if efforts are being made to ensure that is likely to continue. A lackadaisal attitude towards maintaining a franchise branch’s reputation may be a sign of trouble.

Is the franchise able to keep current customers and attract new ones?
Continued growth is always a good sign, which stagnant or diminishing growth is not.

If you have access to the figures, look at the franchise’s marginal costs, and ask yourself these questions:

Are they low enough to ensure success or are they still high?
Consider how long the franchise as well as any newer branches has been in operation in this situation. Newer locations often take a while to show a decrease in marginal costs.

Is there a chance the marginal costs can change?
An increase if they are already satisfactorily low can be a sign of financial problems, while further decreases without a loss of quality or customer satisfaction can be a good sign.

How hard is it to “get into” this particular franchise market?
If it is too easy, and almost anyone can “get in”, overall profits can be diminished. Additionally, the risk of “market saturation” can occur, which can have an effect on the franchise’s value.

If it is too hard to “get into” the franchise, the possibility that the franchise has the “market cornered” may exist. Ask yourself what are the chances that this will continue. Also consider the possibility that making it difficult for others to invest is actually doing more harm than good, as it is causing a lack of “new blood” to be “infused” into the franchise.