What happens when an existing franchisee decides to sell? Franchisees don’t actually “own” the franchised business. In fact, they own the “assets” of the business only. The Franchisor gave them the “rights” to use the name, marks, the operating manuals, the “system”, however the franchisee does not “own” these items. In effect, they rent them from the franchisor during the term of the franchise agreement.
When existing businesses sell, the price is typically based on a multiple of normalized annual earnings or cash flow. Another common term used in the financial industry is EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).
Typically, franchisees want to re-coup every dollar they put into the business and then some. Often this is possible assuming the business is profitable and has a track record. Two positives franchisees sometimes overlook:
1. Franchised businesses that are profitable will typically bring a higher multiple of cash flow in the sales price
2. There is intangible value (because it’s a franchise) that can add to the sales price.
But on the flip side, an existing franchised business (in the eyes of the buyer who is looking to buy a stream of income) is an existing business that happens to be a franchise. Therefore, unless the business is profitable, this buyer will probably not wish to pursue it.
The franchise minded buyer (wants less risk and likes the franchise model) will like the fact that the current franchisee has done most of the hardest work in ramping up the business. The existing franchised business will be very appealing to this buyer assuming he/she has a personality that matches the business model.
So what happens if the business is not yet profitable or is just now at break-even? The franchisee will have to decide how motivated he/she is to sell those assets. Obviously, since there’s no stream of income, the price will need to attract the franchise minded buyer. Will this buyer pay you a price higher than what it would cost to put in a new franchise? Possibly, however several factors enter into the buyer’s decision:
1. Is this franchise territory more desirable than an available new territory?
2. How ramped up is this business? How large a database?
3. How much marketing has been done to create branding in the territory?
In the event the current franchisee has a “short fuse” on when they wish to sell – price may have to be lower than turnkey cost of a new franchise in that system.
