There are three fundamental principles at play that lend a franchise organization its sustainability and its transferability.
First, the decentralized nature of the organizational structure allows the Franchisor to lead the Brand by developing growth initiatives leaving the day-to-day “running” of the business to a vested partner, the Franchisee. This division of workload helps not only the exponential growth of the enterprise but ensures a strong and predictable cash-flow.
Second, the predictable cash flow generated from royalties. Royalties are the lifeblood of any franchise business. Those predictable (most often times monthly) cash flows are attractive to perspective investors, whether they be private investors, fund managers, or public vehicles such as Income Trusts. The predictability of those cash flows allows investors to manage the asset with greater certainty and confidence. On the one hand a Manager can decide to either reinvest the cash in the business, or dividend out on a more frequent basis than annually.
And third, the fact of having all their business processes ‘built in’ and totally repeatable – so they work, regardless of the owner. Franchises are the ultimate transferable business because the basis of the concept is that the business model and the processes can be duplicated over and over and over.
Due to the decentralized nature of the business some franchise enterprises will transact at lower multiples than corporate equivalents based on perceived diminished controls. However, a well run Franchise organization with the right controls in place should be evaluated on par with any corporate enterprise.
Therefore, if a Franchisor wants to transact at a higher multiple and ease the transferability of their business they should build controls into their business early on, before bad habits become too difficult to break. They should also define the Franchisor/Franchisee responsibilities ensuring that their cash flows are solid.