Franchise Resale Value: Factors that Influence Your Exit Price

Understanding franchise resale value is one of the first steps a franchise owner should take when planning their exit strategy. The value of a business determines its return on investment and overall financial success.

Several key factors influence resale price, including profitability, market position, stability of the franchise system, terms of the franchise agreement (including territory rights and renewal options), and current market conditions for similar franchises. By taking the time to understand these factors, franchise business owners can position their business for a successful resale and maximize their investment.

Understanding Franchise Resales

The main difference of a resale between a franchise company and non-franchise business lies in the structure provided. A franchise resale refers to the sale of an existing franchise business unit from one franchisee to another. It involves a complete transfer of rights and responsibilities, including brand use, operational guidelines, and often, an established customer base.

In contrast, selling an independent business that isn’t affiliated with a franchise may offer greater flexibility in operations and branding, but might not have the structured support and established customer base typically associated with the franchise business model. As a result, it can influence depreciation and affect the value of the business.

Franchisor’s Role in Franchise Resale Value

A Franchise Disclosure Document (FDD) typically outlines how franchisors will be involved in the sale of an existing franchise. Not all franchisees have the flexibility to determine the asking price and present value, but some franchisors value their insights when it comes to reviewing metrics.

The following factors can directly influence the financial outcome of selling a franchise unit:

• Right of First Refusal: Many franchise agreements grant franchisors the right of first refusal, allowing them to match or exceed offers made by prospective buyers. This can streamline the transfer process, but may impact sale negotiations.
• Transfer Fees: Franchisors often charge transfer fees to cover administrative costs associated with approving and facilitating ownership transfers. These fees can affect the final sale price and should be considered when pricing the franchise unit.
• Support During Transfer: Franchisors typically offer guidance and support throughout the transfer process. This may include assistance with paperwork, training new owners, and ensuring compliance with franchise standards to maintain brand integrity.

Factors Affecting Franchise Resale Value

Understanding what drives franchise resale value can help franchise owners planning their exit and prospective buyers evaluating investment opportunities. The resale value of a franchise hinges on factors that collectively influence the attractiveness and financial health of a franchise unit in the secondary market.

• Financial Performance: A consistent track record supported by strong financial statements, including EBITDA, plays a role. In addition to cash flow, business owners must consider any royalties and ongoing fees and their impact on valuation.
• Brand Strength: Reputation and brand recognition of the franchise brand reflects on market demand and customer loyalty.
• Location: Optimal geographic placement and accessibility is a big determining factor, influenced by local market conditions and demographics.
• Operational Efficiency: Well-established operational processes and systems can highlight smooth business operations, as can a qualified and well-trained staff.
• Territory Rights and Exclusivity: The presence of protected territories and limited competition can add value, as can perceived opportunities for market expansion within the franchise agreement.
• Remaining Contract Term: An evaluation of the remaining years on the franchise agreement and the opportunity for renewals can influence long-term investment appeal and financial projections for new franchise buyers.

Strategies for Setting an Asking Price

Determining the asking price for a franchise involves much due diligence, and it is a very important step of the process. Working with a business broker and franchise consultant can ensure the process is more thorough. As you look to attract potential buyers, consider the following strategies.

• Conduct a Business Valuation: Use methods such as the income approach (assessing future income potential), market approach (comparing to recent franchise sales), and asset-based approach (evaluating tangible and intangible assets). Consider hiring professional valuators or using valuation tools to ensure accurate financial analysis. Apply industry-specific multiples for benchmarking.
• Review Market Research: Analyze recent franchise sales and monitor market trends to understand pricing benchmarks and buyer expectations. Stay informed about current market conditions to strategically position the asking price.
• Highlight Value Drivers: Emphasize unique selling points such as brand reputation, customer loyalty, strategic location advantages, and operational efficiencies. Prepare comprehensive information packages that showcase the franchise's financial performance and growth potential.
• Consider Flexibility in Pricing: Consider different pricing strategies, including fixed price and negotiable pricing, to adapt to market feedback and dynamics. Remain open to adjusting the asking price based on buyer interest and ongoing market analysis to maximize attractiveness and expedite the sale process.
• Maximize Franchise Resale Value: Improve operational efficiencies before listing, invest in marketing and brand development, maintain accurate and transparent financial records, enhance customer satisfaction and loyalty, and develop a strong management team.

Planning Your Franchise Exit Strategy

For franchise owners considering their next steps, now is the time to start planning your exit strategy. BizQuest can help you learn about the factors that influence franchise resale value and implement strategies to maximize your return. Whether you're looking to retire, explore new ventures, or simply capitalize on your investment, proactive planning is key to achieving your goals.

Visit BizQuest's Business Broker Directory to find a professional to guide you through the process of selling your franchise.