Franchise Strategies
Jul 18, 2025
Learn how to effectively use market multiples to value a franchise, ensuring informed decisions in buying, selling, or exiting a business.
Market multiples are a practical tool for valuing franchises, offering a straightforward way to estimate a business's worth based on industry benchmarks. Whether you're buying, selling, or planning an exit, these ratios can help you make informed decisions by comparing your franchise's financial performance to others in the market.
Key Takeaways:
SDE (Seller's Discretionary Earnings) Multiples: Best for owner-operated franchises with less than $1M in SDE. Typical range: 2.74x to 3.36x.
EBITDA Multiples: Ideal for larger franchises with over $1M in EBITDA. Typical range: 3.82x to 4.17x for restaurants.
Revenue Multiples: Focuses on total income, useful for franchises with steady sales. Typical range: 0.29x to 0.66x for restaurants.
Steps to Apply Market Multiples:
Calculate Financial Metrics: Determine SDE, EBITDA, or revenue from financial statements.
Select the Right Multiple: Match the metric to the appropriate multiple based on industry norms.
Apply the Multiple: Multiply your financial metric by the selected range to estimate value.
Adjust for Specific Factors: Consider brand strength, location, growth potential, and operational efficiency.
Tips for Accuracy:
Use the latest market data.
Normalize financial statements to remove one-time or irregular expenses.
Seek advice from valuation experts for franchise-specific nuances.
By focusing on these steps and factors, you can confidently determine a franchise's value and set realistic expectations for negotiations.
The Truth About Franchise Multiples No One Talks About
Types of Market Multiples Used in Franchise Valuation
When assessing the value of a franchise, three main types of market multiples are commonly used. Each serves a distinct purpose based on the size and structure of the business. Knowing when to apply each multiple is key to achieving an accurate valuation.
SDE (Seller's Discretionary Earnings) Multiple
SDE multiples are ideal for smaller, owner-operated franchises. They combine the business's earnings with the owner's salary, benefits, and discretionary expenses, offering a clear view of the total financial benefit available to a single owner.
SDE is calculated by taking earnings before taxes and adding back interest expense, depreciation, amortization, the owner's normalized salary, non-recurring expenses, and discretionary expenses. This provides a realistic picture of what the business generates for its owner.
For instance, if a restaurant franchise reports $270,000 in SDE and is valued at a 2.89x multiple, its estimated value would be $780,300. At a 3.30x multiple, its value would rise to $891,000. Restaurant franchises typically transact within an SDE multiple range of 2.74x to 3.36x.
SDE multiples are generally applied to businesses with less than $1 million in SDE, making them particularly relevant for single-unit franchises or smaller multi-unit operations.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) Multiple
EBITDA multiples are better suited for larger, professionally managed franchise businesses. This multiple focuses on operational profitability, removing the effects of financing decisions, tax strategies, and accounting practices.
EBITDA can be calculated in two ways: Net Profit + Interest + Taxes + Depreciation + Amortization, or Operating Income + Depreciation + Amortization. This standardized approach makes it easier to compare franchises.
Professionally managed businesses often command higher EBITDA multiples than SDE multiples.
EBITDA multiples are used for mid-sized businesses with more than $1 million in EBITDA. For example, restaurant franchises typically transact within an EBITDA multiple range of 3.82x to 4.17x, which is higher than SDE multiples in the same sector.
Different franchise sectors show varying EBITDA multiples. For example:
Restaurant franchises: 1.5x to 3x EBITDA
Service-based franchises: 2.5x to 4.5x EBITDA
Retail franchises: around 2x to 3.5x EBITDA.
Revenue Multiple
The Revenue Multiple focuses on top-line performance, measuring a business's value based solely on its total income. This method is particularly useful for franchises with steady, predictable sales figures.
Revenue multiples are especially helpful when comparing franchises within the same system or concept, as they bypass differences in operational efficiency and cost structures. Restaurant franchises typically transact within a revenue multiple range of 0.29x to 0.66x.
However, revenue multiples have their drawbacks. They provide a broad snapshot but often fail to account for profitability and efficiency. For example, a franchise with high revenue but slim profit margins might seem valuable based on revenue multiples but could show weaknesses when evaluated with earnings-based methods. In small business valuation, earnings available to the owner are generally seen as a more reliable measure than revenue.
Average revenue multiples range from 0.42 to 1.2 across sectors, with an overall average of 0.65. While less dependable than cash flow multiples for most valuations, revenue multiples remain useful for initial assessments and market comparisons.
Each multiple serves a unique role in franchise valuation. SDE multiples are best for smaller, owner-operated businesses, EBITDA multiples suit larger, professionally managed operations, and revenue multiples offer quick comparisons for franchises with consistent sales. Choosing the right method depends on the specific characteristics of the business.
How to Apply Market Multiples: Step-by-Step Guide
Valuing a franchise using market multiples involves a structured four-step process that combines accurate financial metrics with current market data. Here's how to do it.
Step 1: Calculate Financial Metrics
The first step in a multiple-based valuation is calculating the right financial metrics from your franchise's financial statements. These numbers form the backbone of your valuation, so accuracy is crucial.
Seller's Discretionary Earnings (SDE): Start with pre-tax income and add back the owner’s salary, as well as any non-cash, non-recurring, or discretionary expenses. For example, if a franchise has an adjusted pre-tax income of $640,000, this figure becomes the SDE.
"Seller's discretionary earnings (SDE) helps to show how much money a business buyer will be able to pocket at the end of the day. It can help justify the sale price of a business and convince buyers of the company's value." – The BizBuySell Team
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): Add depreciation, amortization, and non-recurring items to operating income. For instance, a franchise with $100 million in revenue, $25 million in cost of goods sold, $20 million in selling, general, and administrative expenses, and $10 million in R&D costs, plus $5 million in depreciation, would calculate as follows:
Gross Profit = $100 million – $25 million = $75 million
Operating Income = $75 million – ($20 million + $10 million) = $45 million
EBITDA = $45 million + $5 million = $50 million
Revenue: Revenue is the top-line figure on your income statement and should reflect all sales generated by the franchise. Ensure consistency across reporting periods to accurately represent operations.
Once these metrics are ready, you can move on to selecting the proper market multiple.
Step 2: Find the Right Market Multiple
Choosing the right market multiple depends on your franchise's profile and the current market environment. The multiple should align with your business's size, structure, and industry norms.
Match the multiple to your financial metric: SDE multiples are common for owner-operated franchises, while EBITDA multiples are better suited for larger, professionally managed businesses. Revenue multiples allow for comparisons across similar franchise systems.
Use industry benchmarks as a guide: For example, restaurant franchises often trade at 2.74x to 3.36x SDE, 3.82x to 4.17x EBITDA, and 0.29x to 0.66x revenue multiples. Service-based franchises might see EBITDA multiples from 2.5x to 4.5x, while retail franchises range from 2x to 3.5x.
Factor in market conditions: Look at recent sales of comparable franchises in your area. Focus on businesses with similar size, location, and operational characteristics. Understanding your sector’s drivers, competition, and trends will help refine your choice.
Adjust for franchise-specific elements: Consider factors like brand strength, revenue stability, location quality, growth potential, operational efficiency, and compliance with regulations. These nuances help determine which multiple best reflects your franchise’s value.
Step 3: Apply the Multiple to Calculate Franchise Value
With your financial metrics and chosen multiple in hand, calculating the franchise's value is straightforward.
Align the multiple with the correct metric: Use SDE with an SDE multiple, EBITDA with an EBITDA multiple, or revenue with a revenue multiple. For example:
If your franchise generates $200,000 in SDE and the market multiple is 2.5x, the valuation is:
$200,000 × 2.5 = $500,000.If EBITDA is $300,000 and the multiple is 3.5x, the valuation becomes:
$300,000 × 3.5 = $1,050,000.
Use a range of multiples: Apply different multiples within typical industry ranges to develop a valuation range. Document your reasoning to account for market variability and provide realistic expectations for buyers and sellers.
After this, refine your valuation by considering specific attributes of your franchise.
Step 4: Adjust for Franchise-Specific Factors
Initial calculations provide a baseline, but adjustments ensure the valuation reflects your franchise's unique qualities.
Brand strength: Well-known franchises with loyal customers and strong market positioning often justify higher multiples. Lesser-known brands may see discounts.
Operational efficiency: Businesses with streamlined processes, cost control, and strong profit margins tend to receive premium valuations. Inefficiencies, on the other hand, can lower the multiple.
Location and market dynamics: Prime locations with high foot traffic and favorable demographics support higher valuations. Conversely, challenging locations or saturated markets may require downward adjustments.
Growth potential: Franchises with clear opportunities for expansion or increasing demand often command higher multiples. Mature markets with limited growth may result in lower valuations.
Financial stability: A consistent track record of revenue and profitability supports higher multiples. Fluctuating earnings or financial instability typically lead to lower valuations.
Tips for Accurate Valuations and Market Comparisons
Getting franchise valuations right requires reliable data and careful financial adjustments. These tips will help you ensure precision and make the valuation process more effective.
Use Current and Reliable Market Data
The foundation of an accurate valuation is up-to-date, trustworthy market data. Markets shift quickly, so relying on outdated information can lead to misleading conclusions. Stick to reliable sources like government publications, industry reports, academic research, and reputable market research firms. Always check the publication dates to confirm the data is current.
To strengthen your findings, cross-reference data from multiple sources. Regularly review trade journals, business news, and industry reports. For real-time insights, tools like Google Trends, TrendWatching, and Mintel can help you track market movements and spot emerging trends. This approach ensures your valuation is built on a solid and current data foundation.
Normalize Financial Statements
Once you’ve gathered reliable data, the next step is to normalize financial statements. Raw financials often include irregularities - such as one-time expenses or discretionary spending - that don’t reflect the true ongoing performance of the business. By normalizing these statements, you can strip away these anomalies and focus on the franchise’s core earnings.
For example, adjust owner compensation to align with market rates or remove one-time expenses like legal settlements or relocation costs. This process gives a clearer view of the franchise’s operational health, making your valuation more accurate.
Get Expert Help
Franchise valuation can be complex, involving detailed market analysis and intricate financial adjustments. This is where professional guidance can make a significant difference. Valuation experts and experienced M&A advisors bring a deep understanding of franchise-specific factors - like ongoing fees, brand reputation, and territorial rights - that can impact the valuation.
These professionals also ensure no critical adjustments are missed during financial statement normalization. For added support, Franchise Ki offers free consulting services, helping with personalized franchise matching, funding guidance, due diligence, and expert advice throughout the process. Leveraging professional expertise not only ensures accuracy but also makes transactions smoother and more efficient.
Factors That Affect Franchise Valuation Multiples
When it comes to determining the value of a franchise, several factors play a critical role in whether it commands a higher or lower valuation multiple. By understanding these elements, both buyers and sellers can make smarter decisions about pricing and investment opportunities.
Brand Strength and Recognition
A franchise with strong brand recognition often commands higher valuation multiples. Why? Because a trusted brand reduces business risk, attracts loyal customers, and comes with proven marketing systems. Established brands offer built-in advantages that newer or lesser-known competitors simply can't replicate.
A well-respected franchise brand not only builds customer loyalty but also stabilizes revenue streams. When customers trust a brand, franchisees typically spend less on marketing and customer acquisition, which translates into better profit margins and smoother operations.
Protecting the brand’s reputation is essential to maintaining these higher multiples. This means sticking to strict operational standards, following proven marketing strategies, and meeting customer service expectations. These efforts help safeguard the brand’s value and ensure its continued appeal to both customers and investors.
Operational Efficiency and Profitability
Operational efficiency and profitability are key drivers of valuation multiples. Franchises with streamlined operations that deliver consistent and predictable returns are especially appealing to buyers. Why? Because they require less hands-on management, making them easier to run and less risky as an investment.
A track record of consistent profitability is another major selling point. Franchises that show steady cash flow and reliable earnings are less risky, which makes it easier for buyers to justify paying premium multiples. This is particularly important when financing options are being considered.
The franchise model itself plays a big role in operational efficiency. With established systems, proven processes, and ongoing franchisor support, franchises can maintain consistent performance across locations. Efficient cost controls and processes also boost profit margins, directly impacting the valuation multiple.
Growth Potential and Market Trends
A franchise’s future prospects can significantly influence its valuation. Franchises positioned in growing markets or those with clear opportunities for expansion often command premium multiples. Why? Because these factors represent additional value beyond current earnings.
Industries experiencing strong consumer demand or demographic shifts can give franchises a major edge. The ability to expand into new territories or introduce new revenue streams adds even more appeal. For instance, securing territorial rights in high-demand areas or using proven expansion models can drive up valuations.
Adapting to changing consumer preferences is also critical. Franchises that stay aligned with market trends while maintaining their core identity show resilience and long-term growth potential. Additionally, franchises operating in industries with high barriers to entry or distinct competitive advantages often secure higher valuation multiples. These factors, combined with financial performance, create a comprehensive picture for evaluating a franchise's worth.
Key Takeaways for Franchise Valuation with Market Multiples
Review of the Valuation Process
Valuing a franchise using market multiples involves a straightforward four-step approach that can yield dependable results when done correctly. The process begins with calculating key financial metrics such as SDE (Seller's Discretionary Earnings), EBITDA, and revenue. It's critical to ensure these figures are both accurate and normalized for consistency. Next, identify the appropriate market multiple by researching comparable franchise sales within your specific industry and geographic area. Once you’ve selected the right multiple, apply it to your financial metric to determine an initial valuation. Finally, adjust this figure to account for unique characteristics of the franchise.
This method highlights the importance of choosing a multiple that aligns with current market trends and the franchise's overall stability. By following this process, both buyers and sellers can gain actionable insights that tie analysis to real-world decision-making.
Final Advice for Franchise Buyers and Sellers
Building on the valuation process, here are some practical tips for navigating franchise valuations effectively.
First, rely on up-to-date, accurate data and ensure financial statements are normalized. This not only strengthens the credibility of your valuation but also provides a transparent picture of the business's true performance.
Second, consider seeking professional guidance. Experienced business brokers and valuation experts with franchise-specific knowledge can offer critical insights into market trends, comparable sales, and unique industry factors. Their expertise can help you sidestep common errors and ensure the valuation approach fits your specific needs.
For those exploring franchise opportunities, Franchise Ki provides free consulting services to help you grasp the basics of franchise valuation. Their personalized franchise matching and due diligence support can be invaluable when assessing potential investments and understanding what drives franchise value across different sectors.
Ultimately, franchise valuation is a blend of numbers and nuance. While financial calculations lay the groundwork, elements like brand reputation, market positioning, and growth potential often dictate whether a franchise earns premium multiples. Whether you're selling or investing, focusing on these value drivers can help you maximize the franchise's worth in today's competitive marketplace.
FAQs
Which market multiple should I use to value my franchise?
When valuing your franchise, selecting the right market multiple is key. This choice hinges on several factors, including the franchise's brand strength, location, operational performance, and potential for future growth. Here are some of the most commonly used multiples:
Revenue multiples: Best suited for franchises with steady, predictable sales figures.
EBITDA multiples: A solid option for assessing profitability and operational efficiency.
Owner discretionary income multiples: Frequently used for smaller or owner-operated franchises.
To pinpoint the right multiple, take a close look at your franchise's financial metrics and stack them up against industry standards. This comparison helps you arrive at a valuation that reflects both the market and your franchise's unique characteristics.
What mistakes should I avoid when using market multiples to value a franchise?
Common Mistakes to Avoid When Using Market Multiples for Franchise Valuation
When valuing a franchise using market multiples, it's easy to fall into certain traps. Here are a few pitfalls to watch out for:
Relying too heavily on multiples: Multiples can be useful, but they shouldn't be the only factor in your valuation process. Consider other elements like the franchise's growth potential and unique features to get a more complete picture.
Comparing to the wrong companies: If the companies you're using for comparison differ significantly in size, industry, or market conditions, your results could end up way off base. Always ensure you're working with truly comparable businesses.
Overlooking market trends: The business world doesn't exist in a vacuum. Ignoring industry changes or broader economic shifts can lead to valuations that miss the mark.
For a more accurate valuation, think of market multiples as just one piece of the puzzle. Pair them with other valuation methods, and when in doubt, seek advice from experts who can provide insights tailored to your franchise opportunity.
How do franchise-specific factors affect valuation when using market multiples?
Franchise-specific elements such as location, industry trends, and financial performance play a big role in determining valuation when using market multiples. Factoring in these elements ensures the valuation aligns with the franchise's distinct strengths, challenges, and growth opportunities.
Take location as an example: a franchise situated in a bustling, high-demand area might justify a higher multiple, while one in a less desirable location might need a lower multiple to account for potential risks tied to its surroundings. These precise adjustments make the valuation more accurate and reflective of the franchise's true market position.
