Saturday Brain Storming Thought (178) 01/07/2023
FRANCHISE VALUE
Franchise value means the present value of cash flows that can reasonably be expected to result from business opportunities, including those stemming from the different resolution actions that are assessed
Franchise Market
A franchise is a joint venture between a franchisor and a franchisee
The franchisor is the original business
It sells the right to use its name and idea
The franchisee buys this right to sell the franchisors goods or services under an existing business model and trademark
Profit Margin in franchise
The term refers to net profit margin
A company’s bottom line after all other expenses, including taxes and one-off oddities, have been taken out of revenue
It’s a common profitability ratio that offers quick insight into a company’s overall profitability
Profit in Franchise
Profit : unlike a new business, franchises enjoy a good profit margin from the start due to the existing brand reputation and audience demand
Business assistance in franchise
Franchises, by default, receive several kinds of assistance from franchisors to maintain the brand quality of products and services
Advantages of franchisee
1) Readymade business formula
2) Market tested products and services
3) Established brand recognition
4) Large decisions already made
5) List of approved suppliers
6) Training and financial planning provided
7) employees uniform, design layout already fixed
Disadvantages of Franchisee
1) Success not guaranteed
2) Large startup costs
3) Ongoing fees
4) Lack of territory choise
5) Lack of creative control
6) ongoing royalty costs
7) poor location or management may impact business
Franchise P/E
Franchise P/E (Price to earning ratio) is the present value of new business opportunities available to a business
Key Takeaways
1) Franchise P/E is a firms potential growth factor, based on future business opportunities
2) Franchise P/E plus tangible (static) P/E is a firm’s intrinsic P/E value
3) High franchise P/E values indicate a high degree of potential growth
Good of Franchisee
Access to increased purchasing power
Franchise – Asset type
The franchise you purchase becomes an intangible asset that goes on your business balance sheet and is recorded asa noncurrent asset, according to reference of business
This is generally written off asan expense on your balance sheet and affects your bottom line when it comes to taxation
Key Elements for franchising your business
1) Niche products or services – one stop shop or all in one store
2) Widespread demand
3) Simple and effective system
4) Vision and plan
First Franchise
In United States Albert Singer and the Singer Sewing Machine Company as being the first commercial franchisor, dating franchising to 1851
Types of Franchise
1) Job franchise
2) Product franchise
3) Business format franchise
4) Investment franchise
5) Conversion franchise
Examples of Franchise
Franchising is a business relationship between two entities wherein one party allows another to sell its products and intellectual property
For example, several fast food chains like Dominos and McDonalds operate in India through franchising
Risk of franchise
Franchise risk captures the impact of external or internal risk factors on the perceived long term (franchise) value of firm
Benefits of Franchisee
1) claim the rewards of your own work
2) Flexible working
3) Risk avoidance
4) Receive ongoing support
5) Training and support programmes
6) Access to protected territory
7) Economies of scale
8) Greater access to finance
9) Benefit from a reputed brand name
10) Marketing support and access to Marketing materials
Unique of Franchise
1) You are dealing with a concept that has already been tested and proven
2) Concepts comes with instructions
3) There is a third party who has a direct financial interest in your success
Capital in Franchise
Start up Capital
This is the money you pay when you buy a franchise
It is used to fund the franchise fee, buy equipment and initial supplies, as well as to rent (or purchase) and renovate your business premises
Franchise grows by expanding into new markets and reaching new customers
Steps in Selling Franchise
1) Prepare your franchise for sale – start by contacting your franchisors
2) Market your franchise for sale, most business brokers use online portals and their own proprietary databases to market businesses for sale
3) Negotiate and close the deal
Major characteristics of Franchise
1) Solid concept
2) Effective franchise business model
3) A good franchise training programme
4) Established brand image
5) Franchises with larger system size
6) Clear communication with Franchises
7) A feel good franchise
Reasons for franchise failure
1) franchisee doesn’t have the skills to properly operate the franchise
2) franchisee lacks the working capital needed to fund the franchise operation
3) franchisee believes that success is easier to achieve than it really is
4) franchisor fails to train and support the franchise
Compiled by
Compiled by:
Er. Avinash Kulkarni
9822011051
Chartered Engineer, Govt Regd Valuer, IBBI Regd Valuer
