Should You Discount SDE Multiple When It's An Established Franchise?
January 04, 2024
by a searcher in Renton, WA, USA
What's your opinion on SDE multiples of an established franchise compared to its equivalent non-franchise? By saying equivalent, I mean their revenue and profit are about the same.
from University of Pennsylvania in Portland, OR, USA
As long as the franchisor is reputable and proven open to institutional investors so that you could exit if you grow the business beyond the reach of an individual buyer, then I suggest the multiple should be the same as any comparable non-franchise business with the same cashflow and characteristics. Any advantages of the franchisor (great systems and brand support) or disadvantages (poor services relative to the royalty costs) are already baked into the historic results that generated the cashflow you are valuing.
Whether you are comfortable operating within a franchise system is a separate consideration from the value of the cashflow. For example, a searcher with dreams of being a HoldCo King may find the franchisor's restriction on what other businesses types are allowed in the HoldCo's portfolio to be too much to bear, no matter how attractive the initial franchise looks. In my situation I can't add electrical or HVAC services to my plumbing business because the franchisor also offers those concepts and there are existing franchisees in my market with no intent to sell. And I can't buy plumbing companies in other markets and roll them up unless there is no franchisee in the market and I rebrand the acquisition. Many searchers focused on home services want to build a tri-trade businesses or roll-up, so that would be a nonstarter for them. I knew this going in and accepted it.
from Augustana College in Madison, WI, USA
A relevant question to ask yourself is if you even want to purchase a franchise.
A few things to keep in mind:
- From what I've seen most established franchises that go up for resale publicly are underperforming stores. This being because if someone is retiring and selling they let the franchisor know and the franchisor sells it to another franchisee before it even hits the "open market". You could get to know a franchisee directly and have them sell it to you though, but keep in mind you must go through the franchisor approval process and be approved.
- If a franchisor is registered in the state of WI (most decent size brands are) you can download the FDD for free here. https://www.wdfi.org/apps/FranchiseSearch/MainSearch.aspx
Listed in that FDD are current franchisees. Call a few and let them know interested in becoming a franchisee and ask questions. Maybe just my experience but most were very helpful and open to sharing.