Why Franchisors Fail – and How To Help Them Succeed, Part 6

Why Franchisors Fail – and How To Help Them Succeed, Part 6

This is the final installment in a 6-part series about why new and emerging franchise brands fail. In the first two parts, we discussed 8 reasons they fail. Part 3 began our discussion on how franchisors can get it right. This week we look at the financial rewards of “doing it right.”

If you were to contact a business broker to value your franchise, if your EBITDA is under $500,000 you would hear your business valued at about 3 to 4 times EBITDA. However, if your EBITDA started cracking $1 million a year, that valuation would bump up to 6 to 8 times EBITDA.

Most franchisors don’t have 100 franchisees or units and never crack $500,000 in EBITDA. Often the difference between a 3–4X EBITDA valuation and a 6–8X EBITDA valuation is the next 100 franchisees or units.

Units/franchisees

EBITDA

Valuation Multiplier

Valuation

<100

<$500,000

3–4X

$0 to $2 million

>100

>$1 million

6–8X

$6 million to $12 million+


Note the significant increase in equity value when a franchisor climbs from under $500,000 in EBITDA to more than $1 million. A $500,000 increase in EBITDA will create $4 million to $6 million in equity because the multiplier is higher. As franchisors approach 500 units/franchisees (about the minimum number it takes to build national brand-name recognition in the U.S.), valuations can get into the 10X range or higher.

The biggest barrier to blowing past the 100-franchisees/units milestone is how successful the franchisor was in onboarding its first 25 to 50 franchisees/units.

Conclusion: To win, a franchisor needs three things

  1. A proven, replicated, predictable, and highly polished business model.
  2. Skills in how to recruit, train, develop, and lead a team of high-performance franchisees.
  3. A war chest of at least $1 million to cover expenses relating to smart growth; some franchisors will need to invest much more.

If your franchise doesn’t have all three, more than likely you are already making one or more of the 8 Big Mistakes (see Part 1 and Part 2). Luckily, there is time to right the ship while the ship is still seaworthy.

Joe Mathews is a founding partner of Franchise Performance Group, which specializes in franchisee recruitment, sales, and performance. Thomas Scott, senior consultant at FPG, is a franchise lead generation specialist and an expert in creating franchise websites, blogging, SEO, social media, and PR campaigns to recruit qualified franchisees. This is an excerpt from their recent e-book. Contact FPG at 615-628-8461 or joe@franchiseperformancegroup.com.

Published: August 19th, 2014

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