Valuation of a Franchise in a Shopping Centre – Buy Out

BF Valuations Diamond LogoWe were engaged, as Business Valuers, to assess the market worth of a particular franchise located in a major shopping centre.  The reason for our engagement was to assist in facilitating a franchisor purchasing back a franchise business from a previous franchisee.  Unfortunately, in this case, the franchisee had walked away and thus the financials provided were quite out-dated and the business was run down resulting in some outstanding issues which did effect the final value.  As is all jobs, we took the potential buyer’s perspective as to what was required and the costs involved to get into the business.  That list was quite extensive and expensive.

A snap shot of the key elements of that list are below:

  1. Just over 12 months remaining on the Lease with no options – Whilst it is very likely that a new lease would be granted, the market understandably is still very cautious about such short lease terms, especially due to the fact that the likely buyer is likely to be buying a franchise for the first time.  On top of this, Lenders generally only provide loan terms for the duration of the current lease, limiting the number of potential buyers that could afford the loan.
  2. The Shopping Centre required a refit of the store – the quote we were provided for the refit started at $150,000 with the potential to reach to $200,000. This is a very expensive cost for any new owner to wear when they have just entered the business.
  3. Out-dated financials – this springs quite a number of issues, in my opinion the main one is confidence in the financial performance of a business.  Lingering doubt about the performance of a business is likely to result in prospects reducing their offers in an attempt to minimise their risk.

Whilst this business did provide quite a healthy profit, the outstanding/pending costs associated and the uncertainty surrounding the potential return the business provided did not warrant a price that was greater than the cost to enter the business and complete the new fit out.

Lessons to be learnt if you are looking to maximise value for a sale or business loan from this case are:

  1. If you are looking to sell or maximise value for sale or business loan, ensure you have a solid and long lease in place.
  2. Ensure your business is well presented and, if it’s a franchise or in a shopping centre, the fit out is current.
  3.  Have your financials in order and well presented.