Three Keys To Consider When It Comes to Restaurant Franchise Valuation

When it comes to franchise valuation, the list of things that need to be taken into consideration seems endless. There are multiple factors that play a role in determining how much an individual unit is worth— from revenue models and a company’s actual concept to intangible data like a brand’s ability to innovate, franchisees and franchisors are constantly considering new ways to determine the value of their different locations.

However, valuing a restaurant franchise requires its own unique list of considerations. These are the three key factors restauranteurs need to consider to measure their store’s value:

Profits & Losses

The most essential piece of information when valuing a restaurant franchise is its profit and loss statement. A restaurant’s track record of either bringing in consistent revenue or failing to break even determines how much its worth. Bill Wilfong, vice president of franchise growth for Pita Pit, says a franchise’s profits and losses are the first place the health-conscious brand looks when valuing a location.

“We keep it really simple,” said Wilfong. “The rule of thumb we use is that if a restaurant is making money and has a reasonable profit and loss statement, you can get as much as 50 cents for every dollar on sales. That number then starts to drop depending on how well a restaurant is performing.”

It’s also crucial for franchisors to think long term when it comes to valuing a restaurant franchise. Restauranteurs should take the amount of time it will take for a new owner to generate economic benefits or see a return on their investment into consideration.

Potential For Growth

A restaurant franchise’s value also depends on whether or not it’s positioned for future expansion. That means looking at the unit’s physical location, demographics in the area and whether or not the community will provide enough customers to support a successful franchise.

“We need to make sure that our franchisees will be able to make money,” said Michael Morales, chief financial officer for MOOYAH Burgers, Fries & Shakes. “That means looking at everything from competition in the area to average household size and income.”

Things like a franchise’s visibility and how accessible it is for potential consumers also play a major role in a restaurant’s bottom line. Brands need to be aware of what its target audience is looking for, and value locations based on whether or not that criteria is met.

“At its core, Pita Pit is a lunch concept. That means we’re doing 60 or 70 percent of our business between 11am and 2pm,” said Wilfong. “Our restaurants that are in areas where plenty of people are working within a mile of their doors are going to be valued higher because of their strong potential for business.”

Franchise Model

It seems basic, but a brand’s franchise model determines its overall value. Franchising requirements that involve new imaging or even rebranding can sometimes cost more money than they’re worth, depending on the unit. Different models also perform better in certain markets or with a specific group of people than others, altering a franchise’s overall worth. It’s important for franchisors to keep these costs and preferences in mind when valuing a restaurant because ultimately, a franchisor is only as strong as its units. Brands aren’t able to expand their business if their individual franchises aren’t performing well.

“If our franchisees aren’t successful, we aren’t either. At the end of the day our ability to grow as a brand comes down to how well our individual restaurants are doing,” said Morales. “Everything we do at MOOYAH Burgers, Fries & Shakes is to ensure that our franchisees are making money. That’s what helps us increase our value.”