What is a Franchised Restaurant?
A franchised restaurant is a restaurant that operates as a franchisee under the license or brand name of a franchisor. The franchisor owns the brand name of the restaurant and collects royalties (and other fees) from licensed franchisees. In exchange the franchisor gives each franchisee an exclusive territory in which to operate under its brand name for a set period of time. Well known types of franchised restaurants include fast food (Subway), pizza places (Papa John’s), and coffee houses (Dunkin’ Donuts). Some franchisees own multiple units which leverages overhead such as marketing, supplies, and management expenses over multiple franchised locations. Purchasing an existing franchised restaurant (as a franchise resale) usually only makes sense when the buyer is comfortable abiding by the franchisor’s regulations.
Sale of Franchised Restaurants
Selling a franchised restaurant requires franchise approval, franchise transfer fees, franchise training fees (to be done by the buyer), and the consent of the landlord to transfer the lease. The franchisor may also require the seller to update the restaurant’s premises and equipment prior to the sell. The sale of franchised restaurants is heavily dependent upon the benefits that joining the franchise offers to prospective buyers. The prospect of being part of a growing brand which draws customers must outweigh the royalty costs and obligations imposed by the franchisor. A growing franchise and base of customers, along with reasonable terms governing the relationship between the franchisor and franchisee in the franchise agreement, allows a franchised restaurant to sell for a premium valuation multiple. While the sale of a franchised restaurant is subject to the approval of the franchisor, sellers should consult a professional business broker in order to ensure they receive an accurate business valuation while minimizing disruption to their business during the sales process.
Valuing Franchised Restaurants
The median valuation multiple of restaurants for sale in Florida is 2.68 x its annual adjusted owner benefit (or Seller’s Discretionary Earnings). The valuation multiple of most restaurants depends in large part upon its operating margins, local competitive marketplace, and managerial competence. When valuing a franchised restaurant for sale, one must also examine the the merits of the franchisor and the structure of its relationship with franchisees. Buyers are unlikely to pay a premium valuation multiple for a franchised restaurant if the franchised brand is in decline or if the franchisee’s payment and contractual obligations unduly favor the franchisor. Factors specifically affecting the value of franchised restaurants include the franchise agreement and terms, the growth of the overall franchise, and the success of other franchisees.
Franchise Agreement and Terms
- A franchise agreement between the franchisor and franchisee memorializes the terms upon which the franchisee is allowed to do business under the brand name of the franchisor.
- Typically, franchise agreements are ten years in length with renewal options upon the consent of both parties.
- The agreement will stipulate precisely how the franchisor expects the franchised restaurant to operate, what items the franchisee may sell, where supplies must be purchased (sometimes from the franchisor), the hours of operations, the physical assets and appearance required of the franchised restaurant, and the exclusive territory given to the franchisee.
- Since location is so critical to most restaurants, the territory given to a franchisee will play a critical role in its future success.
- Additionally, the franchise agreement will spell out the franchise transfer fee and training fee (for the buyer upon a franchise resale).
- Franchise training often takes place at the geographic headquarters of the franchisor, and may require the franchisee to receive training for several days.
- The franchise agreement also stipulates royalties, marketing fees, and other fees required of the franchisee.
- The franchisor wants to protects its brand name and reputation, and thus generally avoids franchisees who they feel would not represent their brand properly.
- Prospective buyers of franchised restaurants will scrutinize the existing franchise agreements (which is assigned to them after a resale) in order to determine if they are comfortable with its rules, regulations, and financial obligations.
- Since many franchisors give themselves ‘veto power’ over the resale of existing franchises, prospective buyers must meet the franchisor and go through their qualification process prior to being approved.
Growth of Overall Franchise
The driving force of the valuation multiple for a franchised restaurant is the growth of the overall franchise brand. Today’s growing restaurant franchises include health-related concepts, restaurants with innovative menu offerings, and restaurants emphasizing digital ordering with efficient cost structures. A restaurant franchise that is growing its overall number of franchised units while raising the price of new franchise opportunities shows that the overall brand is growing. The stronger the overall growth of the franchise, then the more likely it is that the brand will ‘catch on’ by consumers and drive sales to more franchised locations. Often, the marketing campaign of the franchisor is critically important in growing overall brand awareness among consumers in the local market of the franchised restaurant.
Success of Other Franchisees
An important way in which to gauge the overall growth of a restaurant franchise is by assessing the success and failures of other franchisees. This can be done with relative ease by examining the Franchise Disclosure Document (FDD) that all franchisors must give to prospective franchisees (upon the sale of new franchises or upon the resale of existing franchisees). The FDD contains financial disclosures which documents the sales level of existing franchised locations over different historical time periods. Also, the FDD documents the number of franchised locations added or lost historically, and even provides the contact information of (randomly selected) franchisees. Prospective buyers of franchised restaurants may call these other franchise owners and gauge their opinion about the merits of buying the franchise.
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.