buying existing franchise, need help evaluating

[Porsche951]

looking at 4 yr old location, build cost was 345k when new, 595k in gross sales, asking price is 345k. based on 20 multiple of weekly sales, this business should be priced at 228k. seems every franchise is basing their asking price on build out costs or their purchase price and not the success of the location. what gives? what am i missing?

 

[pizzaboi]

If the valuation based on cash flow is less than the amount they spent to build the franchise, they value the business on the build out cost, so that they can at least recoup the money they invested. That is the sellers logic.

You should be able to negotiate it.

Also franchise do command a higher valuation than independent store with same profitability and cash flow.

What was the net profit including the owner salary at this business?

 

[Porsche951]

is this a common issue with franchises? is it fair assume this is the reality of cost to entry in this business model, or stick to numbers and wait for the right location to come along?

 

[Porsche951]

it makes no sense number wise, its similar to buying a new car, driving it for 4 yrs and asking the full sticker price when new.

 

[Porsche951]

why do you include salary? salary is just that …salary, if i need to pay somebody for their time then I would be in the red.

financial statements are muddy due to their circumstances,

he presented a forecast using his break even calculator to present a clearer picture. while this number is not real it breaks downs as the following.

660k sales
349k food labour
56k other variables
62k del expense
30k rent
61k other fixed costs
100k NOI
60k debt service

40k net cash flow

purchase price was 345k with 45k down at 6% interest with a payback term of 6 yrs shows his break even point of 521k sales, obviously if i came in with 275k cash and lower interest my finances would be different.

 

[pizzaboi]

For small businesses, valuation is based on sellers discretionary earnings (SDE)

SDE includes net income, owners wage, other discretionary add backs (car payments, telephone) that are personal expenses, that the seller puts on the business

From your example the net income is 100k,i am guessing another $35k as managers wages which you would get if you worked on the store.

So sde is 135k.

Is the seller offering financing when 45k down?

 

[Joe]

looking at 4 yr old location, build cost was 345k when new, 595k in gross sales, asking price is 345k. based on 20 multiple of weekly sales, this business should be priced at 228k. seems every franchise is basing their asking price on build out costs or their purchase price and not the success of the location. what gives? what am i missing?

I used to buy franchises. Which franchise is it? Franchise valuations are determined differently than small businesses as franchises typically have safety nets and support in place thus making them more valuable in the eyes of an evaluator.

Based on the perceived value of the franchise (due to success rate), there will be a multiplier. For instance JJ’s, when they were in their growth period from 2006-2013 was given a multiplier of 6x, which is essentially as high as you can go with multipliers for franchises. Using this multiplier, you would take the trailing 12 months of cash flow then multiply it by 6 to find the value of the business. Then any positive or negative leasehold interest, you would add or subtract from that. JJ’s has since over-saturated the market as all franchises do eventually if they succeed to that level and thus their multiplier has fallen to around 2.5-3.5 today primarily depending on the location.

Determine what the multiplier is for that franchise by asking an accountant or broker (not the listed broker for the business being sold lol) and you’ll be able to gauge the proper valuation for said franchise. Any questions, please don’t hesitate to DM me. Best of luck!