The following general rule is usually a reliable barometer:
Around 80% of businesses are worth between three and eight times their profit. Please note, it’s only a general rule but it’s generally correct!
This does not include the property/real estate – so in the case of a restaurant with its own premises, the value of its property would be calculated and added separately.
You could add your salary – the earnings you, as an owner, take out of the business – to the profit figure, as this is something the new owner would inherit.
Factors such as competition, number of years established, growth rate, unexploited opportunities and so on will push your valuation towards the eight times multiple of profit.
If the business is a strategic acquisition then it might go beyond the eight times multiple of profit.
Joe's Convenience Store
Established five years. Good trading location with car parking nearby. Nearest competitor is more than one mile away. It has accommodation above the shop, making it a desirable opportunity.
Annual Sales: $700k (has been consistently $700k for three years running)
Profit (including owner's salary): $100k
Freehold property value: $300k
Because of the common nature of the business – being a convenience store – the business will be valued at the lower end of the 3x8 multiple of profit. But because the convenience store is established for five years, has good trading history and has little nearby competition it would not be unreasonable to ask for a four times multiple of profit – so $400k. However, it would arguably be difficult to sell at a higher price.
Add to this the freehold value of the property of $300k.
It would therefore not be unreasonable to see a business like this valued at $700k
What's the product?
"New Zealand has a small population and if a product only appeals to a niche market then it may not work here – even if it is successful overseas. But be aware that new niches are developing all the time: concepts such as Mexicali Fresh or Noodle Canteen would probably not have worked 15 years ago but changing demographics and new eating habits have made them viable now."
What is the franchiser offering?
"Good franchises have always had a policy of re-investing in their businesses through product research, systems upgrades, adoption of new technology and other forms of support and marketing,"
"Similarly, they insist upon franchisees upgrading their own premises or systems on a regular basis. If they do this well, it pays off
What has been others' experience?
Talk to other franchisees in the system about their experience, and find other small businesses in a similar position to yours. You need to get an accurate idea of costs.
How much do you have to pay in future?
Franchisers will take a fee on an ongoing basis - it is common for a percentage of sales to be taken each year as a franchise fee, and to pay a marketing levy."
"Ongoing fees, sometimes called royalties, management fees or licence fees, are separate to and additional to the upfront franchise fee you paid at the beginning.