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Franchise Valuations, an Auntie Anne example

What is one way to gather sample financial results for franchises when the franchisor refuses to make optional financial disclosures in their UFOC? Check out the classified ads of businesses for sale. While the classified ads will generally disclose very basic and very vague financial information, such as annual sales and net income or cash flow, you will start to get a picture of the going valuations and metrics used (such as a multiple of earnings before income, taxes, depreciation and amortization; or a multiple of free cash flow), all of which will help you understand the financial models and drivers for the business.

The financial disclosures in classified ads should be taken with a grain of salt. Why? You need to understand accounting and finance, or hire someone to help you with the valuation and explain the tax and valuation factors used in determining what type of free cash flow and return on your invested capital and time you can expect to reap. You also need to understand finance to know if you are comparing apples to apples. For example, all of these will make a huge difference in what the valuation means to you:

  • Seller’s Loan payments and interest rates
  • Lease payments
  • Upcoming or postponed capital improvements
  • Wages per employee, total wages per day
  • Wages and distributions paid to the owner, if any
  • Competition near location (knowing that there are several competitors in the mall is better, because if there are no competitors you know that sales will mostly drop when a competitors moves in)
  • Your(buyer’s) financing options and interest rates
  • Expenditures for accounting/legal (did they owner do their own accounting, or pay an accountant, what will you do?)
  • Cash/theft rates
  • Franchise renewals – how soon before the franchise agreement expires, and will there be required remodeling or purchases as a condition of the franchisor to renew the franchise?

Below are two Auntie Anne’s for sale:

#1 – Worcester County, MA, USA
Asking Price: $175,000 USD USA Dollars
Business for Sale Industry: Food & Beverage: Non-classifiable
Reason for Selling: other business interests
Year Established: 1995
# of Employees: 1FT/8PT
Yearly Revenues: $269,687
Yearly Cash Flow: $70,690

Auntie Anne’s Pretzel franchise located in a recently renovated mall. Be part of one of the fastest growing international franchises. Any new owner would benefit from the training offered at both the corp. HQ and on site. With a very reasonable rent in place for the next 7 years this store is ready for a new owner/operator to take it to the next level. A great opportunity for a first time business owner looking for the security of a franchise with minimal expense and maximum potential. Get in now before the busy fourth quarter when things really boom!

#2 – Auntie Anne’s Pretzel Franchise – Massachusetts (MA)

Asking Price: $65,000
Gross: $312,000
Cash Flow: $81,400

Business Summary: Auntie Anne’s Pretzel franchise located in a thriving destination shopping mall. This shop is in it’s fourth year of operation, the rent will remain steady for the next 2 years and there are options available. The rent includes the utilities, trash removal, and all common area expenses. The mall has been updated with stable anchors such as Macy’s and Target and the cinema is being renovated. This is a great opportunity for an owner/operator to both improve revenues and profitability as it is currently run absentee. Any buyer would need to be approved by the company and spend two weeks training in PA, The key to this operation is the very low cost of goods for this product, it is simple, straight forward, and a high margin operation to run. This store is being offered at a reduced rate as the absentee owner is motivated to move on and it is a fantastic opportunity considering a buyer avoids the normal $30k franchise fee. The initial start-up and build out cost for a new franchise is estimated at $275k.

Year Business was Established: 2003

Number of Employees: 1FT/9PT

Both have around $75,000 in cash flow, but one is selling for $65,000 and the other is selling for $175,000. The $65,000 must be a great deal, right!?!?! Not so fast. The owner is selling for $65,000 already sunk in $300,000 in build out and initial costs, and is implying that at the end of last year he had $80,000 in the business’s bank account. I’ll buy $80,000 worth of cash for $65,000 any day, but the owner obviously isn’t that stupid. Something is going on here for the price to be so low in contrast to his capital outlays and claimed positive cash flow. More likely he is just making ends meet, and the headache of managing teenagers who will rob you blind and not show up for work is driving him nuts.What is better = Buy an existing franchise or open up a new franchise? Buying an existing franchise is often preferable if one is available in your area. The risks are much lower because you have a sense of the business economics and customer visits before investing. Also, you avoid the higher franchise fee and sellers tend to discount their upfront build out costs. Of course, most of the time the franchise you desire does not have one for sale in your preferred geographic area, so buying and building a new franchise is your only option.

About Ryan Knoll

Attorney and advisor with an interest in franchising. Feel free to email me comments and questions on the "Contact Us" page.

One comment

  1. When will the seller of the franchise hand over the financial information? How much information should I expect and how do I know it is true?

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