Hi all, I have looked at acquiring both franchises and independent operators in a number of sectors. Is there a rule of thumb on the valuation multiple spread between a franchise (resale) and an independent operator, assuming the businesses are identical in all other aspects? Obviously franchises have the additional fees (royalty, marketing, etc.) and there are also upfront transfer fees. Assuming after fees the 2 businesses have identical EBITDAs, growth patterns, margins, etc., what is your take on which should command a higher multiple, and what type of premium? I can see arguments on both sides for which should command a higher multiple - franchises offer something of a safety net with corporate support, name recognition and potentially less downside, though the franchisee is also constrained in what they can do with the business in terms of new services, geographical expansion, acquisitions, and also the franchisor will have a big say on the exit. In case you're curious, this relates mostly to residential and commercial services, but I would be curious if there is a general rule of thumb that is applied across the board. Thanks!
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I would assume that the severely limited exit alternatives (all buyers must be approved by the franchisor) is the primary factor that'd put downward pressure on franchise business multiples. If you achieve meaningful scale within a system, that system will only have a small handful of potential buyers - who will be further filtered down once you take into account their capital availability / level of leverage, whether the asset makes sense to own, etc. That, and the fact that franchisors won't let you operate more than X% of total units, basically puts a cap on both future earnings potential and monetization potential of the business, and thus, the valuation multiple.