Assessing the Value of Your Franchise Business

Conducting a franchise valuation or appraisal is one way of determining the value of the franchise business. It is performed regularly in the process of seeking additional financing or in tax planning. Many expert valuers can give you a rough estimate for your business, just like many property agents can provide you drive-by estimates for houses along a route. Whatever the case, knowing the right way to do it is critical in achieving the correct value.

Value of your assets approach

The value of your business represents the value of assets you have in your portfolio. When shown in financial statements, it becomes the book value of investments. It takes into consideration the depreciation of assets such as buildings, vehicles, and equipment. Unfortunately, the assets value approach does not consider your business’ incomes and expenses.

Comparative business approach

The comparable business approach offers an estimated figure to the worth of a similar business. Many franchisors are involved in the sale of franchisee’s businesses as they possess comparative data on performance. It is easy to find relative businesses in popular franchise models that one can benchmark to determine value.

Revenues generated approach

The capitalization of income looks at the value a buyer would pay to attain ‘X’ yearly income by a business. Comparing the cost to acquire with potential annual income gives a rough idea of whether such an investment is solid. Most investors will compare instances where they would invest a similar amount into treasury bills and other fixed-rate investment alternatives. If investing in a franchise made more money, then the revenues generated approach has provided the basis of that decision. Other factors to consider are risks associated with the operations of such a franchise model.

Combination of three

In a formal process, the appraiser will compare the three valuations to determine the final figure. In this case, the reason for conducting an appraisal will determine whether the final tally is high or low. For taxes, the lower the value, the better. For a potential sale, a high valuation means the buyer pays higher for the business.

Determining the correct value of your franchise business is an essential step in decision making. As such, you should consider all factors that may affect the value of the company and the potential outcomes you wish for before undertaking the process.

Originally published at https://tutoringcenter.com on June 24, 2021.