I ask this question re: franchises as a acquistion choice because I had never considered it as an option until very recently. I re-evaluated my search criteria this past summer and decided to do a very tight geographic search and find a company that allowed me maximum flexiblity to spend with my family. It also became more important to me to acquire a company I could grow and run for the long term and only sell if I decided to. Once I decided what was really important to me, all of sudden a franchise seemed worth a look.
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Let's say an Independent has 20% EBITDA margin, and you want to pay 4.0x. On $1M EBITDA would be $4M EV. The similar Franchise will have 15% EBITDA margin, so actually $750K EBITDA. For the same EV, the Franchise would be a 5.33x. That's a 1.33x drag for being a franchise!
Higher base EBITDA margin, lower the drag. With 45% Independent EBITDA margin ($2.22M revenue), EBITDA = $1M, 4.0x multiple, EV = $4M, the Franchise would have 40% EBITDA margin, EBITDA = $889K, same EV would be 4.50 or a 0.50x drag.
So pricing about a 1.0x drag could make sense! Not to mention the illiquidity of the asset, since potential buyers are limited / institutional investors may not want to touch due to non-compete clauses (can someone confirm?)
Can share quick model. Any thoughts?