Determining what a franchise for sale is worth can be a bit confusing. There are many components to franchise valuation and to determine the value of a franchise, a variety of factors need to be taken into account. Merely reviewing records will not give you the whole story of a franchise’ value. There are a variety of factors used to determine the value of a franchise, and several different approaches to franchise valuation.
Franchise Valuation Elements
The first component of a franchise valuation is the financial state of the country, state or province, and city or district. A painstaking evaluation is also done of the company’s financial state. Financial records of the company are then normalized for a more accurate picture of the franchise’ value. Future trends, the competition, and the volume of the market are also considered during a franchise valuation.
Franchise Valuation Methods
The three basic approaches to franchise valuation are the income approach, which calculates the fair market value of the franchise; the asset approach, which adds up the net assets of the franchise; and the market approach, which compares the franchise to other similar companies in the same industry.
Franchise Valuation through Income Review
The income method may involve discounted future or capitalized cash flow. The excess earnings of a company can also be determined by combining this income method with the following assets approach.
Franchise Valuation through a Review of Assets
The assets review methods figures out the total worth of the possessions of the company. Fair market value is often utilized in order to properly adjust the assumed worth of the different components of the franchise. Unfortunately, this approach to franchise valuation only accounts for the franchise’ concrete assests. Consequently, the assets review method of franchise valuation is generally only used for liquidation proceedings.
Market Method
A review of supply and demand within the market of a company is used for franchise valuation with the market method. Supply and demand can drive the value of a franchise down or up. The market method is like comparing recently sold comparable real estate when selling homes and other properties. A comparable private record may be located and review or information from publicly traded franchise can also be assessed.
A lending institution may be able to offer additional assistance with franchise valuation.
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