Valuation of Franchise Companies: Guide for Franchisors

The valuation of a franchise company – from the franchisor’s perspective – requires a practical approach that takes into account both proven financial metrics and the specifics of franchising. Whether preparing for a sale, taking on investors, or strategic planning, a realistic company value is crucial.

What is the best way to proceed? Our recommendation: With a mix of methods and intuition. Use key figures such as EBITDA and multipliers for a quick overview, but supplement these with more in-depth methods such as DCF to map growth potential, and with brand value considerations to quantify intangible assets.

If possible, orient yourself to practical examples from your industry, but keep the individual situation of your system in mind. This is how you arrive at a reliable, comprehensible valuation that convinces both you as a franchisor and potential investors.

Quick Guide to Franchise Valuation: Important Key Figures and Formulas

Step 1: Determine EBITDA as a basis: First, calculate the EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization) of your franchise company. This result before interest, taxes and depreciation reflects the operative earning power.

Formula: EBITDA = Net income + Interest + Taxes + Depreciation

Example: If your franchise headquarters has a net income of €200,000 and depreciation of €50,000, the EBITDA is €250,000 (with negligible interest and taxes).

Step 2: Select a suitable multiplier: Research common EBITDA multipliers in your industry or use comparative data from similar franchise systems. This multiplier (multiple) represents, in simplified terms, the factor by which the annual earnings are multiplied to derive the company value. Typical ranges depend heavily on industry, size and growth. For example, individual fitness studios are often valued at 3 to 5 times their EBITDA, while large, established franchisors can achieve significantly higher multiples. A revenue multiplier (e.g. 1× to 2× annual revenue) can also serve as an initial feeling for value if EBITDA fluctuates greatly.

In the franchise context, the recurring revenues (e.g. annual franchise fees/royalties) are particularly considered – an investor could, for example, set a multiple of the annual royalty income as the value, analogous to the revenue multiplier.

Step 3: Calculate company value: Apply the selected multiplier to your EBITDA.

Formula: Company value = EBITDA x Multiplier

Example: With an EBITDA of €250,000 and an industry-standard multiple of 6, the company value is €1.5 million. Note that this represents the Enterprise Value (total value of the company including debt) – to derive the equity value, you may need to deduct financial liabilities and add liquid assets.

Step 4: Plausibility check with other methods: Validate the result by cross-checking with other methods. For example, create a rough Discounted Cash Flow (DCF) calculation based on your business plan to check whether the multiplier value is justified. You can also determine the asset value (net asset value) as the lower limit. If all methods agree on an order of magnitude, the trustworthiness of the valuation increases. Especially in franchising, it is recommended to consider not only the pure fee income of the headquarters, but also the value of the brand and the network – e.g. with the Relief-from-Royalty method for the brand value (see below).

How Do I Determine the Brand Value of the Franchise System?

A significant difference to the valuation of a classic company is that the value of the entire franchise system must be considered, not just the value of a single operation. Franchisors usually own valuable intangible assets, above all the brand and the business concept.

Relief-from-Royalty Method (Brand Value via Royalties)

This method is a special procedure for valuing such intangible assets, especially trademark rights. It is often used in addition to the company valuation to determine the proportion of the total value that can be attributed to the brand itself.

Principle: The value of a brand or franchise concept results from the fictitious license fees that a company would have to pay if it did not own the brand itself, but would license it from a third party. Because the franchisor uses the brand independently, it “saves” these license costs – this “savings value” is discounted to the present day and results in the brand value. In other words, how much would someone else pay to be allowed to use the brand?

Procedure: First, the expected revenue-related revenues attributable to the brand are determined – in the franchise case, these are typically the system revenues of the franchisees or the franchise fees generated by the use of the brand. An appropriate license rate (%) is then applied to this. Usual license rates for well-known brands often lie between e.g. 1% and 5% of the turnover, depending on the industry – concrete values can be determined by market comparisons of similar brand license deals.

This results in an annual notional license fee. After deducting taxes on these fictitious revenues and discounting over the expected useful life of the brand (often an infinite or very long useful life is assumed, possibly with a growth factor), the present value of all Royalty Savings adds up to the brand value.

For franchise companies, this method can show which part of the total company value is justified by the brand and the system know-how. In practice, the brand value calculated using Royalty-Relief often flows into DCF or earnings value models (for example, by adding it to the asset value). Example: Assume a senior care franchise generates €50 million in system-wide annual revenue and comparable care brands have license fees of 5% of revenue. The hypothetical annual license fee for the brand is then €2.5 million. If you deduct e.g. 30% taxes and discount this net charge with a suitable factor, this results – depending on the assumed growth and discount rate – in a considerable brand value potential (e.g. roughly €15–20 million present value over the coming years). This value would come additionally to the pure asset value of the headquarters and explains why buyers often a high premium for established franchise systems pay: They acquire not only existing profits, but also a strong brand, the use of which would otherwise cost license fees.

Note: The Royalty-Relief method combines elements of market and earnings valuation. It makes sense when the brand value plays a major role – quite relevant for well-known franchise brands. However, it requires careful research into comparable license rates and involves uncertainty in the assumption of future revenues. In Germany, this procedure is often used in the context of brand value appraisals (e.g. for accounting or tax purposes), while easier to communicate methods (DCF, multiples) usually dominate for the overall company valuation in negotiations.

Further information about the DCF and asset value method can be found in the blog post Valuation methods