What’s a Franchise Worth?

90% of businesses fail in the first five years.  When I hear this statistic, what jumps at me is that 10% of the businesses succeed.  So, naturally, I want to know why?

What do the 10% of the businesses that survive do, or do differently that they make it?  What is their secret?

The number one reason for business failure is owners’ mistakes or misjudgment. If only there was a coach or a partner who can share their first-hand experience, someone who has a vested interest in their growth, and someone who is willing to go the extra mile and ensure your success. Such angels are sometimes called franchisors.

Want to learn about 5 methods of valuation? Click here.

Let’s see what a franchise is worth…

About 5% of businesses in America are franchises, contributing 3% to US GDP, and employing 9 million people.

There are THREE latest trends in the franchise industry –

1. Millennials and Baby Boomers. Combined they represent 44% of the population, with millennials being the fastest growing and boomers with 55% of the wealth. No wonder franchisors are customizing their products and services to attract them.
2. Digital Marketing. Gone are days of direct mailers, and a kid with cardboard at an intersection. With the capability of targeting your precise customer, you can find that perfect 32-year-old newlywed couple who is looking to join a gym. Did you know 40% of all marketing dollars spent online are spent on Google, Facebook, and Amazon ads?
3. Eye in the Sky. Now everything can be watched and measured remotely. It is easy to collaborate across states with franchisors and service providers. It’s easy to send your CPA daily progress reports. It’s easy to keep an eye on your cash register from your kid’s recital. Nothing tops physical presence, but remote monitoring is a very close second.

Rule of Thumb

Some franchises are valued as a multiple of EBITDA. Some as a percentage of sales. Some as regular businesses. But if you compare a franchise business to a non-franchise business, as a rule of thumb

Franchises are worth 10-20% higher than a comparable business that is non-franchise. For example, if there is a sandwich shop that is valued at $500k, the same sandwich shop if were a Subway would be worth $550-600k. Why? Because franchises transfer goodwill from the old owner to the new owner seamlessly. The customers almost never experience a drop-in service or quality.

Do you know the difference between Equity Value and Enterprise Value? Learn more.

There are three ways to maximize the value of your franchise –

1. Relationship with Franchisor. Think of the franchisor as your coach and business partner. They have been around the block and know all the mistakes you are likely to make. They have a tried and tested method to success. Isn’t that why you got the franchise? Stick to the plan. Of course, tweak it to fit your local/business needs, but stay within boundaries. Don’t worry about how much money franchisors are making off of you. They will be more inclined to help you when they make money. Let them also taste your success.
2. Community Outreach. Marketing is a fancy term to stay on top of people’s minds. A franchise is a living breathing entity there to serve the community in which it operates. To serve the community beyond the goods and services you offer. This exposure is priceless marketing. No one wants to think of a faceless business, let people know who you are and that you are there to help them.
3. Grow Your Tribe. Franchise operations is a people business. Employees tend to be complacent because they are employees. So the best way to tackle this problem? Invest in them. Send them for training. Bring the trainers in-house. Work with other franchisees and create a program, so you all are working to increase the size of the pie. And believe me, your franchisor will love you for it!

The franchise concept is as American as apple pie and is a failsafe recipe for a successful business so long as you are willing to follow the trail of breadcrumbs laid out for you. When the British East India Company set sail, were they not just a franchise arm of the old Empire?

When McDonald’s set up shop in Malaysia it brought a piece of Americana with it and paved the way for American companies to expand in Asia. When Marriott expanded into Europe it opened a new avenue for European real estate investors. Homogeneity is good when it comes to business operations, managing customer expectations, and creating a legacy.

To me, franchising is the beacon of globalization.

Bharat Kanodia – Founder and Chief Appraiser