Valuing Your Franchise

Valuing your Franchise
If you are using a business broker, they can appraise your franchise. Business brokers don’t value franchisees as such. If you need a professional valuation you can get this from your accountant or from a valuer.

Whatever the valuation, it's wise to look at a value you are happy with. Whoever does a valuation for you will explain how they arrived at the price. Accountants will value your franchise based on financial results and other details of the company. They will use standard formula's to calculate a figure and then compare that figure with a personal assessment of the franchise, based on their knowledge. At the end of the day, the value has to be agreeable to you, so your accountant will explain how the figures were arrived at, to see if you agree.

Valuing Goodwill
The value of any business includes an amount for goodwill. Goodwill is regarded as the difference between the value asked for and the actual value of the assets of the business. Goodwill includes the value of such things as the company name, reputation, intellectual property, customer base, contracts it holds, lease of premises it uses, etc.

Methods of Valuation
A number of valuation methods are used to arrive at a value for your franchise.

They can be the following:

  1. An arbitrary type method.
    Here the business owner determines a fair price. They may or may not have a true basis for their calculation, but will arrive at what they think is fair based on the price of other franchisees sold, or what they consider is a goodwill value, as well as the value of assets etc. This is not always an accepted method because the franchise can be valued lower than it's worth. If it is valued higher than it should be, the buyer will soon show his/her displeasure and ask for the price to be negotiated.

  2. Capitalisation method.
    Here the valuation is based on the true profit of the franchise after deducting a reasonable return for the owner's investment in the franchise, as well as a salary the owner would normally be entitled to. The difficulty here is determining the rate of return. If the franchise was considered to be risky, the capitalisation rate would be high. If there was little risk attached to the purchase of the franchise, the rate would be low.

  3. Super profits method.
    This method is a good one because it looks at 2 important points:

    1. The method looks at the value of the business more from the point of view of the buyer.
    2. This method also determines a reasonable return for the owner of the franchise and takes into account the future profits the business is liable to make. Most professional valuers look at determining future profits as part of their valuation strategy.

What the Buyer may Value the Franchise at
The value you place on your business will be the figure used for the starting point of negotiations. It is unlikely buyers will accept the price straight off if they think it can be negotiated down. Buyers will not put a value on the franchise until they have carried out their own due diligence and have seen every area of the franchise.

They will then involve their own accountant or valuer in order to reach a realistic price for the business. At the end of the day the price set will be based on what the buyer wants to buy it for and what the seller wants to sell it for. It will come down to a negotiated figure agreeable to both parties.