An 8-Figure Franchisee member was looking for advice:
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I own one franchise and looking at buying a neighboring location that’s failing. They are asking $250k, which is extremely overpriced, as their net income was negative $25k last year. |
This type of question frequently arises in our community.
Here’s what I told him:
I used to get stuck on the profit multiple for valuation.
For example, most small businesses trade at 2.5-3X.
It would need to make $100k/year x 2.5 to justify the $250k price
However, when a business is not profitable, value is determined by the assets.
Start with a simple comparison:
What would it cost to start a new location from scratch?
Let’s say it’s $150k.
This struggling acquisition is asking $100k above that, but comes with:
- Existing customers / sales
- Some market awareness
- Potentially trained staff
Those assets have value and create a faster path to profitability than starting from zero.
Instead of haggling over price, focus on the structure.
I consider two factors: return on my cash investment and incremental cash flow.
No bank is going to finance a business losing $25k per year and shelling out $250k in cash wouldn’t make sense.
Let’s offer a seller finance deal:
- $30k down
- 7% interest for 7 years
- Monthly payment $3,300
In Year 1, I would address the low-hanging fruit to generate ~$5k in monthly cash flow. Annualized, this gives me a 200% return on my $30k cash investment ($60k of cash flow / $30k investment)
In Year 2, I would fine-tune operations with the goal of $10k per month in cash flow.
After Year 5, the $30k investment has generated $500k+ in cash flow.
I use the new cash flow to acquire and open more locations from scratch.
Each incremental one gets easier & easier.
This is the power of compounding without a portfolio of franchises.
Want my help in negotiating franchise deals & structuring seller financing?
Respond “M&A” and I’ll send you the details.
I only have 5 more openings for April, and then we go on the waitlist for May.
Cheers!
Brian
