Franchise multiples vs. regular businesses

September 09, 2024

by a searcher from Northwestern University - Kellogg School of Management in Atlanta, GA, USA

I’ve been looking at a certain industry and it seems like regular businesses are going for 3X but franchises are going for 4X. Same industry.

why? Ultimately, I’m looking at how much money is left after I pay off my loan and franchises just never look as good. There something I’m missing?

I thought about making an offer to ask people to lower the price, but I would love to hear thoughts from the community first

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

Franchises have limitations in terms of geographical territory constraints, limited acquisition opportunities (must be in-system and approved by the franchisor), limits on additional products / services you can offer, etc. So while you might have a higher floor, you also have a lower ceiling. I'm not arguing for franchisees to trade at a discount to independent players, but there are both advantage and disadvantages. Note that I'm a fan of franchise resales as a path for ETA, so this isn't meant to be negative at all. Like everything else - it depends...

Also - even if they don't give you a copy of the franchise agreement pre-LOI, you can likely find the FDD on websites like franchimp.com, which will contain the franchise transfer fee as well as other relevant info.

Reply by a searcher
from University of Pennsylvania in Greenwich, CT, USA

I would add to the general discussion a point that has likely been made on other franchise threads here: just be aware of potential adverse selection when it comes to buying into a franchise system from the outside. Existing franchisees are the preferred buyers and will get first look in most cases, so I'd just make sure to ask / try to understand why other franchisees aren't buying it. Doesn't mean you shouldn't do it or anything, but something to be cogniscent of.

Btw, thought this recent podcast was very informative on franchising:
https://joincolossus.com/episode/the-art-of-franchise-investing/

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