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Franchise Valuation - Predicting the Future

Franchisors and franchisees alike are highly concerned with franchise valuation. Higher valuations, assuming the assessment is conducted fairly, generally indicate more profitability for all; franchisors earn more profits selling higher valued sites, franchisees earn more profits operating those sites. Almost all franchise valuation indicators are retrospective, meaning the calculation for valuation assumes the franchise is already operating. Take this article, for example: valuation is calculated by measuring EBITDA earnings for an individual site. And that’s not the only example. Look at similar articles here, here and here.

And that, in our humble opinion, is a major problem.

This after-the-fact business valuation strategy won’t help anyone manage risk. Think about it from the perspective of each party: if you are a potential franchise investor, you want to know how much profits a new site will generate before you negotiate a price. And if you are on the selling side of the equation - a franchisor looking to earn money from franchisees - you obviously want to negotiate the most favorable pricing before the deal closes.

Both parties need to be able to predict the future.

How do you predict the future? Two of the most basic and critical metrics you will need are buyer density and gross buying power.


Interested in learning more about the franchise process? See these related articles: 

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