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

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 [email protected].

Published: August 19th, 2014

Share this Feature

McAlister's Deli
SPONSORED CONTENT
McAlister's Deli
SPONSORED CONTENT
McAlister's Deli
SPONSORED CONTENT

Recommended Reading:

Hot Dish Advertising
ADVERTISE SPONSORED CONTENT

FRANCHISE TOPICS

MSA Worldwide
ADVERTISE SPONSORED CONTENT
Franchise Leadership & Development Conference
Conferences
InterContinental, Atlanta
OCT 7-9TH, 2025

We are a marketing production company that helps businesses communicate and grow their brand through print, branded apparel, and specialty engraving....
Create, distribute, and send personalized email marketing and SMS campaigns across multiple customer bases all at once.

Share This Page

Subscribe to our Newsletters