As a business broker specializing in restaurants, I am often asked whether restaurant franchise resales are more valuable than independent operations. The short answer is yes. While each business case is slightly different, the multiple applied to a franchise resale situation is higher than the one used for an independent restaurant. Why is that the case? The following factors all impacts the initial valuation and pricing.
Strength of Books and Records
Most brands require their units to conform to a common chart of accounts (meaning all costs are recorded the same way) or use a standard vendor for accounting provided by the brand. This does not go unnoticed by restaurant buyers or by those doing SBA lending. Compared to the “Wild West” of accounting standards employed by operators not forced into this type of discipline and you can understand why the books and records for franchise brands rank higher with buyers. This leads to higher pricing and ultimately, higher sales recorded against these units.
Franchise resales that have the benefit of a major national brand command higher pricing because the units are recognizable to both the lender and the public. The marketing for a known brand name attracts more buyers to the business, increasing competition among interested parties for the listing. This drives higher asking prices and ultimately, stronger sales prices.
Training for “Newbies”
It is not uncommon for those new to the business to seek a path to training only offered on franchise resales. A “mom and pop” store may have outstanding food but if those recipes have never been systemized, shared, and trained to others, the path for growth is limited. A buyer may feel constrained by the ability to replicate the very thing that attracts customers to the store.
Most franchise resales have the same training requirement as someone launching a new store. While it varies by concept, it can include, for some brands, up to eight or nine weeks of training before the store can change hands. That ensures that the experience of the customer is the same each time, even after the sale, the very hallmark of the franchise business model.
When buyers are considering which location to acquire, they may be swayed by these training requirements and willing to pay more for franchise resales that offer this enhanced experience.
Track Record on Lending
The SBA or Small Business Administration tracks loans and defaults by brand. For franchise resales, bankers can check the list and see how well that brand has performed by gauging the number of defaults on loans. That provides the lender with a stronger sense of security about lending on franchise resales. All lenders require an external valuation of the business by a third party. In our experience, in seeing hundreds of deals approved for lending, franchise resales, when submitted for external valuations, deliver higher opinions of value.
It is not just this Restaurant Broker’s opinion that franchise resales earn a higher price at market. A recent study conducted by three experts at the Marshall E Rinker Sr. School of business reached the same conclusion. Their peer reviewed study titled, ““Determinants Impacting Resale Premium Disparity when Selling a Small Business: A Predictive Non-Linear Approach” will be published in the Fall 2021 issue of the Journal of Business and Economic Studies.
Their study reportedly looked at 2,159 business resales over a 10-year period. They found that the franchise businesses sold at a 1.5 times higher price than non-franchise businesses. That’s consistent with our trends in selling restaurants where SDE or Seller’s Discretionary Earnings applied to a multiple, show a similar disparity in listing and selling prices.
Dr. John P. Hayes, director of the Titus Center for Franchising has seen the research and he is quoted as saying, “If two people operate the same type of business over a period of years and enjoy similar sales, the franchise business is more likely to sell at a higher price point. Business owners ought to be aware of that information in advance of launching a business.”
Overall, anyone in the market for franchise resales, should expect to pay more. Likewise, a seller who invested wisely in a strong brand, can expect a higher payoff when it comes time to sell their restaurant.
We Sell Restaurants is the nation’s largest business broker franchise focused exclusively on the sale of restaurants, with 20 years of experience in helping buy, sell, and lease hospitality locations. We Sell Restaurants and its franchisees have sold thousands of restaurants across the county and maintain a listing inventory of more than $120 million online at their powerhouse restaurant for sale marketplace, including independent and restaurant franchises for sale. We Sell Restaurants is offering franchise opportunities for their brand in select market areas. For more information, visit www.wesellrestaurants.com