How is the valuation of a franchise business different from the valuation of other businesses?

Posted on Jan 16, 2014 | 0 comments

There are several reasons to define “how is the valuation of a franchise business different from the valuation of other businesses”? But before you go any deep into that, you need to realize the main structure of franchise business. A franchise is actually a business relationship between the franchisee and franchisor whose main purpose is to earn capital on the basis of selling services or products. Before you start valuating a franchise business, you need to consider the value of assets the franchise hold and also the business relationship between the franchisor and the franchisee. In simple words, the value of a franchise cannot be assessed individually but by adding the capabilities and condition of franchisor as well.

Difference between the franchise business and other businesses:
The main difference lies in their definitions and structures but there are many other differences which you need to understand to understand this completely.
1) The most important difference in the franchise and other businesses is ownership. In case of franchise business, the full ownership is not possessed by only one entity as in other businesses. There is a franchise agreement which carries all the rules and must be read carefully before doing any trade with the franchise.
2) In other businesses, you will not find a strong relationship between two entities like in case of a franchise business. A franchise runs only on the basis of strong relationship between the franchisee and franchisor. While in the case of all other businesses, the only relationship is with customers which are never one entity. So while valuating a franchise business, you need to assess the relationship between the franchisor and franchisee very carefully.
3) The valuation of a franchise business is done by keeping in account the management skills of franchisee and franchisor while in the valuation of other business, the whole team management skill is considered.
4) Another important point which must be considered while valuating franchise business is the appropriate discount. In order to keep this in mind, one must read the franchise agreement quite carefully.
5) There is no such federal law defined for the valuation of franchise business as compared to all other businesses. All you could find is the federal legislation regulating franchise relationships as according to different industries.
6) When it comes to franchise business, the bad product at one franchise will affect the whole business. In other businesses, no such thing exists.
7) Transfer of a franchise business from one ownership to another is also a very complex method.
8) There are some specific conditions in every franchise agreement which will strongly affect the valuation of franchise business. These conditions include several risks and other such points which must be closely read and legally considered before dealing with any franchise business.

Thus overall, all of the above mentioned points signify that there is a huge difference in the method of valuation of a franchise business and cannot be compared with the valuation of other businesses.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>