In these tough economic times, the question I am asked most often is, “What is my franchise business worth?” This month’s column will outline a few key points that may be helpful in determining that worth.
In many cases, the key index of valuations is the public market. As the public market has been in such disarray, I am not sure it is indicative of an arm’s length valuation selling price for most private companies. For instance, in the week ending July 11, 2008, DineEquity stock lost 22 percent and other losing stocks included Jack In The Box at 15.1 percent, Red Robin at 14.5 percent, Wendy’s at 13.2 percent, and Triarc Companies at 11 percent. This is not necessarily the best news, but we do know most private equity companies have stabilized more than public markets.
There are a number of important points to recognize, and these points have changed the landscape of looking at the value of franchise businesses. Please keep in mind the following points when discussing the worth of your business:
* So called “Restated or Normalized Earnings” are not going to carry much weight. Buyers are looking to base value off of real GAAP earnings.
* Any potential buyer is going to factor in the trends looking forward. For example, if sales are declining, the potential buyer will assume sales will continue to decline. The idea of “average sales” over the past few years is not going to work.
* Most conservative value assumptions are going to be made as it relates to growth, capital expenditures and cost controls.
* High multiples and speculation are gone.
* The flexibility of a concept and the ability to react to changing economic conditions will add a premium.
* Historic multiples may not be relevant. Franchise business sales transactions that occurred six months prior to your valuation and received a premium pricing are a thing of the past.
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