Pricing Strategies for Unprofitable or Low-Profit Franchise Resales

When setting the asking price for an unprofitable or marginally profitable franchise resale, it’s crucial to adopt a conservative approach. Here are some general guidelines to help achieve fair and realistic pricing:

Key Valuation Metrics

The pricing of small businesses is often calculated using a multiple of SDE (Seller’s Discretionary Earnings), which reflects the total financial benefit an owner-operator derives from the business. This includes net profit, the owner’s salary, discretionary expenses, and non-recurring costs. However, for low-profit businesses, these multiples may not hold the same relevance as they do for established, highly profitable franchises.

Pricing Guidelines

For unprofitable or low-profit franchises, the asking price must reflect the risks a buyer assumes while considering the business’s tangible value and future potential. Setting a realistic, achievable price increases the likelihood of attracting serious buyers and ensuring a successful transaction.

• Unprofitable Businesses: These are often priced near the value of tangible assets, typically 0.5x to 1x the combined value of equipment, inventory, and other physical assets.
  — Example: A franchise with $50,000 in assets might be listed for $25,000 to $50,000.
• Marginally Profitable Businesses: For franchises breaking even or earning a small profit, pricing usually falls between 1x and 2x SDE. Factors such as location, brand strength, and growth potential influence the final multiple.
  — Example: A business with an SDE of $30,000 might be priced between $30,000 and $60,000.

Key Pricing Considerations for Struggling Franchises

Setting the right price for a low-profit or unprofitable franchise is a delicate balance between reflecting the business’s tangible value and attracting serious buyers. By understanding key valuation metrics, market conditions, and buyer motivations, sellers can position their business for a realistic and successful sale.

• Asset-Based Valuation
  When profitability is low, pricing often relies on the value of tangible assets. Consider the following:
  — Equipment and Inventory: Calculate the fair market value of all physical assets.
  — Leasehold Improvements: Favorable lease terms or recent upgrades can enhance the valuation.

• Turnaround Opportunities
  Buyers may pay a premium if they see potential for improvement, but sellers must be realistic about risks. Examples include:
  — Relocating from a poor location.
  — Improving underperforming staff or management.
  –– Addressing a lack of marketing with proper investment.

• Impact of Franchise Fees
  Franchise businesses come with ongoing royalties and initial franchise fees. Sellers should account for these costs in their pricing, while buyers must assess whether current revenues can sustain these obligations.

• Market Conditions and Location
  Market and location heavily influence pricing:
  — A prime location in a growing market may justify a higher price, even for a struggling business.
  — A business in a declining market or less desirable area will require more conservative pricing.

• Franchise Brand and Support
  The strength of the franchise brand and the level of franchisor support can affect the asking price. A well-established brand with strong franchisee support often commands a premium, even for underperforming locations.

• Seller’s Motivation
  The seller’s urgency impacts pricing:
  — Highly Motivated Sellers: May lower the price for a quicker sale due to financial or personal reasons.
  — Emotionally Attached Sellers: May overvalue their business, potentially deterring buyers.

Summary of Pricing Guidelines

• Unprofitable Businesses: Price near tangible asset value (0.5x–1x).
• Marginally Profitable Businesses: Use 1x–2x SDE.
• Consider: Turnaround opportunities, market conditions, and franchise brand strength.