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How to Value a Small Business Franchise

how do you value a small business

If you've done any research at all you know that finding a small business franchise isn't the problem. The problem is, with so many to choose from, how do you compare all of the business franchise options available, and calculate their comparative value? One solution is to determine the value of a franchise based on the quality you perceive balanced against the investment you will have to make. The following list of questions is designed to help you calculate a rough estimate of the "personal investment commitment" you will have to make to launch and support any new franchise.

What is your total franchise investment?

The Uniform Franchise Offering Circular (UFOC) materials for most franchises will report many different total investment amounts - due to differences in the size of the business, location, services provided, employee complement, owner participation, etc. The only way you can make this number apply directly to you is to do your own research, and do it thoroughly. First, determine exactly what franchise model you will open and then interview franchisees that are operating that exact franchise structure. Even then, always work with the highest costs that you have recorded, so that you cannot underestimate the actual total investment figure.

How long will it take for your franchise to break even?

Again, the break even number will vary due to even subtle differences between the operations of existing franchises. Make sure you interview franchisees whose franchise models are as close to the model you plan to adopt as possible. Then, be as charming

as you can be, because you want to learn as much as possible from their experience. Keep clear notes and add up your calculations to make sure you have gotten a complete picture of their full startup costs. As always, go with the highest figures you collect in your research. Remember, until you break even, the money to keep your business running will have to come out of your own pocket. From the break even point you can calculate how long you may need to live on your savings or loans, including paying your living expenses, etc, before your small business franchise can be expected to keep you in the black.

How much money will you make from your franchise?

The first year, and possibly the second will often be a loss. By the end of the third year, in almost all cases, there should be regular profits. Determining what level of profits is normal by the end of that third year is critical to your franchise research. To calculate an accurate profit forecast you must interview franchisees running a close match to the franchise model that you plan to open. In addition, you must collect and average the profit reports from a large number of franchisees to ensure that your forecast is accurate. Don't settle for less than six interviews with similar franchisees, and 10 to 12 interviews would be even better. Establishing the likely long-term income that you can expect from a small business franchise is the only way to measure the return on your investment.

Category: Personal Finance

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