Acquiring a Franchise? - YES - NO - MAYBE
October 05, 2021
by a searcher from Columbia University - Columbia Business School in 1835 Palisade Ave, Teaneck, NJ 07666, USA
I ask this question re: franchises as a acquistion choice because I had never considered it as an option until very recently. I re-evaluated my search criteria this past summer and decided to do a very tight geographic search and find a company that allowed me maximum flexiblity to spend with my family. It also became more important to me to acquire a company I could grow and run for the long term and only sell if I decided to. Once I decided what was really important to me, all of sudden a franchise seemed worth a look.
from Columbia University in 1835 Palisade Ave, Teaneck, NJ 07666, USA
I forgot about the Jim Sharpe article so thank you @Joel Potts for sharing the link.
@Robert Kennedy ...thank you for this ...exactly the nuanced details I needed to hear to hear on what to look out for and questions to ask when I speak with franchisors and their franchisees
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@Sam Page ...thank you so much for the thoughtful response. This is very helpful. I would love to follow up with you to chat more once I get down the road on evaulating franchises. Re: growth, I am wondering if it is possible to find the needle in the haystack franchise that allows you to grow revenue without a geographic expansion -
@Ryan Olander...thanks very much for sharing your story, I would love to chat more and will DM you.
@Ernest Benjamin...thanks for your comment on brand and location...I had really discounted brand as I was thinking of it more as acquiring an independent business with backoffice support for marketing, etc. I spent the last decade working for a nonprofit SBA lender which was industry agnostic and focused on underwriting good solid businesses so I have to de-program myself I suppose.
@Ryan Morris, thanks for your insight on the key points to consider - industry, brand and passion. I am meeting this afternoon with what I think of as an executive recruiter for franchisors - they had me take a personality assessment and then match me with franchises that fit your work style, background, interests, etc. Deciding on an industry has admittedly been a struggle for me during the search process so if nothing else taking a look a franchises may help me narrow down industries that I can get excited about.
@Jarryd Osborne...great point Re: profit margins, I am adding this to my list as I prepare to speak to the 'franchise recruiter' this afternoon. As I mention above, I am looking for the needle in the haystack that allows growth without multiple locations.
Thanks all and apologies for the loooong post. Enjoy the rest of the day!
from University of Pennsylvania in Washington, DC, USA
Let's say an Independent has 20% EBITDA margin, and you want to pay 4.0x. On $1M EBITDA would be $4M EV. The similar Franchise will have 15% EBITDA margin, so actually $750K EBITDA. For the same EV, the Franchise would be a 5.33x. That's a 1.33x drag for being a franchise!
Higher base EBITDA margin, lower the drag. With 45% Independent EBITDA margin ($2.22M revenue), EBITDA = $1M, 4.0x multiple, EV = $4M, the Franchise would have 40% EBITDA margin, EBITDA = $889K, same EV would be 4.50 or a 0.50x drag.
So pricing about a 1.0x drag could make sense! Not to mention the illiquidity of the asset, since potential buyers are limited / institutional investors may not want to touch due to non-compete clauses (can someone confirm?)
Can share quick model. Any thoughts?