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How to Value a Restaurant Franchise

Starting your own restaurant business is no walkover.

A lot of work goes into building the brand and growing a loyal customer base. However, buying a restaurant franchise can help make your dreams of owning a restaurant easy to achieve.

By buying a restaurant franchise, you leverage the already built brand, trademark recipe, and loyal customers. One issue with buying a restaurant franchise is valuing it, but we will give you relevant tips on valuing a restaurant franchise.

How Can I Value a Restaurant Franchise?

One vital thing that you must be done before deciding on which restaurant franchise to buy is valuing. Now we have your attention let us discuss how you can value a restaurant franchise before buying it. Some important terms to note are Franchisor and Franchisee. The franchisor essentially is the seller of the franchise. The franchisee, on the other hand, is the buyer of the franchise.

There are three different valuation approaches. These approaches are the income approach, asset approach, and market approach. We will discuss the income approach.

What is the Income Approach of Valuing Restaurant Franchises?

Income based valuation approach deals with the present and future cash flow values. You are required to determine the current and projected returns that come with this shared ownership.

To be able to achieve this, three things must be put into consideration. They are the current cash flow, projected restaurant growth, and the risks the restaurant franchise faces. We will start by looking at the cash flow.

  • Cash Flows – to determine the cash flow, you must consider the operating margin and capital expenditures. Net income after tax deductions may serve as some form of cash flow. If your restaurant franchisor earns from other sources, analyzing the cash flow may be a bit more complex. In that case, you should consider other factors like changes in wages, the amount spent on store upgrades, price of the goods and services, etc. All of that data can be polled from a restaurant POS System such as Rezku.
  • Projected Growth – with restaurant franchisors, the Growth may increase in franchises, the income per franchisee, or further acquisitions. An increase in the number of franchisees will mean extra income for the franchisor. Usually, Growth is accompanied by increased cash outflow.

The franchisor’s Growth may not necessarily favor you. In some cases, it may even increase the amount you pay to the franchisor as royalty. In a sense, existing franchisees and new franchisees may even become competitors. The competition can lead to the existing franchisee being taken out of business.

  • Risk – big franchisors are, to an extent, immune to macro-level trends. This fact can be explained by the fact that the profits a franchisor enjoys are, to a large extent, not subject to little changes in revenue.

If you are yet to understand the concept of restaurant franchising, don’t worry. We have taken time to explain it in the subsequent sections.

What are the Interesting Things about Restaurant Franchise?

If you have been dreaming of owning a restaurant, you no doubt have come across the solution of franchising. Buying a restaurant franchise offers you less of the risks that come with owning a business and more of the juicy benefits. You stand to gain an already recognized brand with custom recipes and loyal customers.

In exchange for restaurant franchisors’ extensive network and other benefits, you get to be responsible for the restaurant franchise’s daily operations and management. Let’s address the common questions that plague would-be restaurateurs about restaurant franchising.

Should I Buy a Restaurant Franchise?

Some situations make buying a restaurant franchise ideal. For many people who would love to own a restaurant, buying a franchise is a great way to go out of this. Restaurant franchise provides the ideal opportunity for you to open your dream restaurant at a lower cost and great benefits.

There are numerous to owning a restaurant franchise offers you. They include acclaimed brand recognition, great marketing strategies, and many more. Also, owning a restaurant franchise mitigates many of the risks that come with owning a restaurant. We have outlined some of the advantages it provides you with.

  • Instant Brand Recognition – with a franchise, you can save the time and energy you would otherwise have used to create and build a reputable brand. Instead, you’ll be using the brand platform created by the franchisor and selling their goods and services.
  • Instant Loyal Customers – building customer loyalty can take several years. Restaurant franchising takes care of this problem. Buying into the franchise provides you with the franchisor’s customers and clientele base. Thus, you can jump-start straight to raking in heavy revenue, growing your base and your business.
  • Built-in Marketing – Another great advantage of buying a restaurant franchise is getting access to the existing management and marketing structure. Effectively, this means that you are getting invaluable marketing strategies and policies as part of the franchising deal. So, in addition to everything else, you get to sell the goods and services with the logo, trademarks, and marketing strategies that have been proven to boost sales and business growth.

What Should I Do Before Buying a Restaurant Franchise?

Buying a restaurant franchise is not as simple or cheap as you may think. Many vital things must be checked out and put in place before purchasing one. Let’s look at the concepts you should understand and things to look out for before buying a restaurant franchise.

  • Understand What Makes a Restaurant a Franchise – this is the first step to correctly value a restaurant franchise. As the first step, you must understand why some restaurants are franchises, and others are not. Most people run on the impression that recognized big-name restaurants are franchises. However, this is not true. Starbucks, for example, though a big name in the restaurant world, is not a franchise.

Not every restaurant chain is a franchise. For example, although Starbucks is one of the most recognized chains globally, it is not a franchise(source). Buyers of franchises (franchisees) pay a royalty to the franchisor. In return, these franchisors take care of things like menu design, marketing, and management.

  • Check Your Budget and Restaurant Niche – buying restaurant franchises can be expensive. The high costs will most times limit your choices of a restaurant franchise. It is important to get a franchise that meets your desires while still being within your budget. We also advise you to carry out a market survey to help you determine if the franchise will fill an existing need.
  • Draw up a Sound Business Plan for the Restaurant – as with other businesses; you will be required to draft a business plan. Your restaurant business plan should fill the gaps in your restaurant franchise. Bear in mind that a great business plan will help you secure financial support from banks and other investors.

Your business plan will require you to check out the franchise’s history, including their current and past financial status. We advise that you dedicate time to this step, especially if you plan on investing in a new restaurant franchise.

  • Understand How Franchises are Valued – Before you take the bold step of buying a restaurant franchise, we advise that you take time to understand how they are valued. If you fail to pay to learn about this, then you expose yourself to unimaginable risks. The franchisor should present documents showing the growth trends, tax returns, and financial statements.
  • Find Out More About the Management Team – from the point you decide to commit to a restaurant franchise, you will be linked. Thus, we advise that you find out all you can about the franchisor. Find out how they make business decisions if it is autonomously or carrying their franchisees along. Learn about the management team also. Do not be afraid to ask your questions and seek clarification on concepts that you don’t understand. Remember that for your restaurant franchise to succeed, you all need to work hand in hand.
  • Check the Restaurant Franchise’s Projected and Current Growth – You must grasp the restaurant franchise’s growth potential you intend to buy. It will help if you look out for growth indicators.

An excellent pointer of this is the expansion of the restaurant franchise in new locations. If the franchisor has franchisees that have opened up even more locations, it is safe to say that the franchise is thriving. Thus, it is wise to purchase it.

If, however, you discover that a lot of the existing franchisees are selling their locations, we advise that you hit the brakes. It could indicate that the franchisees do not make enough profits. Thus, buying into that restaurant’s franchise system is not a wise idea.

Conclusion

Buying a restaurant franchise is a brilliant way for would-be restaurateurs to start their dream restaurant. It provides you with great benefits like access to an already established brand name, proven marketing strategies, and loyal customers. Before purchasing a restaurant franchise, it is important to check the value. Please take advantage of the information in this article.