How do you know you are investing in value?
Your success as a franchisee depends on buying the right franchise at the right price. While a franchise is a proven business model, you must invest at the correct valuation. We help our clients to buy where value is present – it’s critical to your return.
Here are some factors that affect franchise valuations.
Overriding the value of the business opportunity is the current state of the economy and the sector in which the franchise business operates. If the market is growing, valuations will be higher. If in decline, valuations will be lower. The potential size of your customer base also affects valuation.
How well-known the brand is will have a large bearing on the value of the franchise. Brand recognition plays a large part in customer pull – the more recognizable the brand, the more customers you should be able to attract. Or, at least, that’s the theory.
Amount of franchisor support
A franchisor is likely to offer you support. This may be by way of initial training, ongoing training, admin, equipment, etc. You may also receive marketing materials, and help with promotion. A franchisor may also help with HR issues.
Some franchise agreements include clauses that require you to refurbish the unit at regular intervals. You should check this, as remodeling costs can be large.
Commissions/fees due to the franchisor
The franchisor will make money as fees or commissions/royalties on sales made by your franchise. You may find that the more revenues or profits you make, the lower the level of commission you will pay. There may also be minimum payments expected by the franchisor. The amounts of payments made to the franchisor will impact the valuation of the franchise, and you should always have contracts and Franchise Disclosure Documents checked by a lawyer experienced in franchise business.
How many hours do you want to work? Some franchises may require to be open 24 hours a day, seven days each week. You should factor this into your planning and consider it when valuing the business as an opportunity for you.
Length of franchise agreement
A franchise agreement is a limited time agreement. You’ll want to be sure that your investment will pay good returns that not only provide an income, but also pay your investment back as a minimum. The longer the franchise agreement, the more opportunity you will have to make sizeable profits. This will be reflected in valuation.
The above factors are not the only factors that you should consider when valuing a franchise for purchase. However, they should give an idea of how to value franchise opportunities – the depth at which you must research and the expertise you should hire to ensure all the I’s are dotted and the t’s are crossed.
To learn more about valuing franchises and starting out on a positive footing, contact New Ground Consulting today.