Valuing Franchise Agreements

The negotiable value - including intangible value or "good will" - of a franchise depends on the terms of the franchise agreement. In addition, growth within a territory can lead to friction with existing franchisees. The addition of a new site near a franchisee can result in a tremendous overall revenue of the system (and thus an increase in royalties and other payments to the franchisor); but it comes at a price for the existing franchisee, who in a way becomes the newcomer`s competitor and risks reducing his income. If the discount is too great, the existing franchisee can leave the business. Nevertheless, for many reasons - management buyout, share transfer, dissolution of marriage, tax planning, etc. - the value of a deductible must be determined. The fact that a franchisor`s profits are less fluctuating, due to small variations in turnover, is an advantage and reduces the risk-taking of an investment in a franchisor. On the other hand, there are also risk factors that are significantly higher for franchisors than for other companies. Many of them are legal.

Franchisors may be vulnerable to collective action of various kinds, although the success rate in Canada has been poor to date. [4] Franchisors are also subject to a strict disclosure regime in many Canadian provinces; the failure to provide a proper duty-free disclosure document ("FDD") can be serious, as franchisees are potentially entitled to terminate their contracts and recover all costs and losses within the first two years of signing the franchise agreement. In my experience in quantifying these claims, the average bill to a franchisor is somewhere between $300,000 and $500,000, plus legal fees. Cambridge Partners is considered a leading authority in the valuation and valuation of the assets of franchised operations. The company has conducted portfolio and individual asset valuations of fast restaurants (QSR), hotels, auto repair, fast throughput, fitness center and much more. Excluding goods and equipment, the typical franchise comes from most of its revenues from its intangible asset franchise agreement. These agreements add value to their owner (the franchisee) by supporting sales and profits in the following way: despite the benefits offered by franchising, such as. B The consistency of the products, which customers can rely on, the restrictions imposed by the franchise agreement can reduce the value of a franchised business compared to comparable separate businesses. Franchise agreements, for example, generally limit deductibles to a defined geographic area, limit the products and services they can offer, and control the prices they charge. All of these restrictions can hinder a franchisee`s ability to grow and develop. When evaluating a franchise, evaluators are careful not to accept market multipliers without a precise analysis.

Multiples can serve as a rule of thumb and provide an estimate of the ball fleet of value, but as an indicator of real value, they are only as good as the underlying data. Multiples, based on actual sales of other franchises of the same franchisor, are the best indicators of value, but this data can be difficult to find. Franchising is one of the most common forms of business in Canada.

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