Is 10X EBITDA normal for franchise groups?

August 05, 2024

by a searcher from Louisiana State University - E. J. Ourso College of Business in Atlanta, GA, USA

I'm talking to a broker representing a group of remediation franchises. The group is doing $500k EBITDA and the broker is adamant that it'll go for $5m. Most businesses I've reviewed are not franchises but are considered high at 6x.

Are valuations like this normal for franchise groups?

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Reply by an investor
from New York University in New York, NY, USA

I've looked at acquisition of existing remediation franchisees before - that is an insane valuation. Doesn't matter if it's Servpro, Servicemaster, or whoever - probably double what is standard, especially if the franchisee seems to be underperforming. If they have additional licenses for adjacent territories, there could be additional value in those (given they aren't revenue producing yet), but still the asking price is way off. I'm a big fan of franchises and not worried about the royalties as that is baked into your EBITDA already, but the issue is that your growth is limited geographically to your territory, so the valuation ultimately gets somewhat capped by your market, even if you assume maximum growth. Happy to discuss if I can be helpful as I've spent a decent amount of time looking at the various franchisors in the remediation sector.

Reply by a searcher
from College of William and Mary in Oldsmar, FL, USA

Think about it like this: Series A and B tech start-ups can command 10x ARR. While a franchisor may want a 10x valuation, the reality is that a series A tech co. can grow exponentially, and this franchisor can only grow linearly. So.... I'd price the franchisor at the standard 3x to 5x for a $500 Ebitda company. Also consider that the ARR is not as secure as you may think. Until they get accross the###-###-#### franchisee line, it's risky biz. They could lose a few franchisee's next year and begin a downturn in the organization. Good luck to you my brother. If you really want this biz, and need to know more about the industry, give me a shout. I have a freind who owns a restoration franchisor biz.

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