Franchise Operations

To elaborate, there are 3 primary asset classes in the Franchise Industry (concept, business enterprise, and real estate). Each can have their own investor (s) or a company may choose to own 2 or all 3. Typically, however, you will have a Franchisor, Franchisee, and Landlord.

• Franchisor – owns the concept and receives royalty as compensation
• Franchisee – owns the business and pays royalty for using concept and rent for using real property
• Landlord – own real property and receives rent as compensation

There are 2 components to valuing a franchise. In this example, let’s say were looking at a restaurant.

1. Business Value –multiple of EBITDA adjusting for such things as:
   • An implied market rent deduction for fee units – eliminating beneficial arrangements
   • Eliminating non-recurring and extraordinary expenses from P&L
   • Franchisor G&A allocation
   • Franchisee Royalties that do not meet general licensing levels for franchisor (i.e., favorable franchise agreements)
   • Capital Expenditures (e.g., a required remodel) and associated revenue enhancements
2. Real Estate Value – land and building calculated using:
   • Market based rent
   • Market Capitalization rate
   • Comparable properties sold

Note: Business Value can be further examined by looking at historical P&L’s in the economic analysis and using a Build-Up Method to determine capitalization rate or multiple of EBITDA. These factors are inherent in the Income Method of Valuation and build upon market equity rates of return w/ premium for things like company size and risk. The Build-Up Method can also be used to calculate the appropriate discount rate when using Discounted Cash Flow as opposed to capitalized income/EBITDA. The income methods can also be supported by the Market Approach which compares multiples of recent transactions.