25 Apr Selling Existing Franchises (Part 2 of 2)
Today’s posting continues yesterday’s subject about selling existing franchises. The following article is from the Business Reference Guide and excerpted from a presentation to the American Institute of Certified Public Accountants by Bernard Siegel, Siegel Business Services, Philadelphia, PA.
Key Considerations When Pricing a Franchise
“Lease Terms—If the lease doesn’t contain a provision for at least 10 years remaining, the price can be affected accordingly.
“Franchise Rights—If there aren’t at least 10 years left in the franchise agreement, a price adjustment downward should be made. This may not be applicable in those states where the franchisor may not terminate the agreement unless there is a default.
“Territorial Rights—If the franchise agreement does not provide for territorial rights, this could be a minus. In other words, if the franchisor can open additional units in the immediate area, the value of the existing franchise could be diminished. However, if the franchisee has additional territorial rights then the value may be increased.
“Business Mix—If the bulk of the sales is in low-profit items, value may be diminished; whereas if high profit items make up a substantial part of the business, value may be increased. Is there wholesale business? Do one or two customers make up a majority of the business? Business mix should be considered.
“Remodel Requirements—Does the franchise agreement state that the business has to be remodeled periodically? How often and how much remodeling? The value of the business may be reduced by the cost of the remodeling, depending on when it has to be done.
“Hours of Operation—Does the franchisor require specific hours and days open? Some franchisors, especially food related, donuts/convenience stores, may state that the business has to be open 24 hours a day, seven days a week. The shorter the hours, the better the price.
“Location—Obviously, the better and more desirable the location, the better the price.
“Cash Flow—The price of a small business may be based on its sales history rather than on reported profitability. Some businesses are just not operated efficiently from a cash management point of view. Certainly, strong cash flow benefits the price asked, but a poor cash flow coupled with strong historical sales does not necessarily detract from the price.”