A franchise business has a number of characteristics that make it different from a nonfranchise business, and they need to be considered when doing a valuation. Here are some interesting takeaways from a recent webinar conducted by Nevin Sanli, president and founder of Sanli Pastore & Hill Inc.:
- Empirical data generally show that franchised firms are more valuable than nonfranchised firms;
- Check on a franchisor’s right to sell over the internet, which is becoming more prevalent; it may cut into a franchisee’s business depending on how the arrangement is structured;
- There is a significant imbalance of power between the franchisor and franchisee; the franchisor has significant control over many aspects of the franchisee’s operations;
- Most franchise agreements say the franchisor owns goodwill, but a franchisee’s specific goodwill can become an issue in certain cases, such as a divorce matter; and
- Franchised auto dealerships are a “very different animal” from other franchises, so take special care when valuing this type of operation.
It’s also critical to carefully examine all of the provisions in the franchise agreement and disclosure documents because they can significantly affect the risk and the value of the business, Sanli advises. He points out that, in the franchise world, there is a wide disparity of relationships between franchisees and franchisors. Sanli’s webinar is Valuing Franchises: Beyond Restaurants (archive recording available).
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