A Subway franchise can be valued calculating the enterprise value based on its annual revenue, expenses, and EBITDA, and applying an industry-specific multiple.
If you’re considering buying a Subway franchise or selling one, it’s important to know how to value it properly. In this blog post, we’ll cover the key factors to consider when valuing a Subway franchise and the methods of valuation you can use to determine its worth.
How to Value a Subway Franchise? – Methods and Calculation
Valuing a Subway franchise would typically involve using several methods, including the discounted cash flow (DCF) method, the multiples method, and the asset-based method. Here is an overview of how each method might be used:
1. Discounted Cash Flow (DCF) Method:
The DCF method involves estimating the cash flows that the Subway franchise is expected to generate over its lifetime and then discounting those cash flows back to their present value using a discount rate that reflects the risk associated with those cash flows. This method is commonly used to estimate the intrinsic value of a business.
To use the DCF method, you would need to make several assumptions, such as the expected growth rate of the franchise, the expected rate of return on the franchise, the expected capital expenditures needed to maintain or grow the business, and the expected discount rate to use in the calculations.
Once these assumptions are made, you would use a spreadsheet or financial calculator to calculate the present value of the franchise’s expected cash flows.
here is an example calculation in a table chart for the Discounted Cash Flow (DCF) method:
Assumptions:
- Subway franchise generates $500,000 in revenue and $75,000 in net income per year.
- The expected growth rate of 5% per year.
- Expected capital expenditures of $25,000 per year.
- Expected holding period of 10 years.
- A discount rate of 10%.
| Year | Expected Cash Flow | Discount Factor | Discounted Cash Flow |
|---|---|---|---|
| 1 | $75,000 | 0.909 | $68,182 |
| 2 | $78,750 | 0.826 | $64,980 |
| 3 | $82,688 | 0.751 | $62,150 |
| 4 | $86,823 | 0.683 | $59,264 |
| 5 | $91,164 | 0.621 | $56,356 |
| 6 | $95,721 | 0.564 | $53,455 |
| 7 | $100,503 | 0.513 | $50,582 |
| 8 | $105,518 | 0.466 | $47,752 |
| 9 | $110,777 | 0.424 | $44,979 |
| 10 | $116,289 | 0.386 | $42,275 |
To calculate the present value of the franchise’s expected cash flows, you would multiply each year’s expected cash flow its discount factor and then sum those values. In this example, the present value of the expected cash flows is $540,985.
2. Multiples Method:
The multiples method involves comparing the Subway franchise’s financial performance with similar businesses in the same industry to arrive at an estimate of the franchise’s value. This method typically uses financial ratios such as price-to-earnings (P/E) ratios, price-to-sales (P/S) ratios, or enterprise value-to-EBITDA (EV/EBITDA) ratios to compare the franchise’s financial performance with its peers.
To use the multiples method, you would need to gather financial information about similar Subway franchises, such as their revenue, net income, and EBITDA. You would then calculate the relevant financial ratios for each franchise and use those ratios to estimate the value of the Subway franchise you are interested in.
Here is an example calculation for the Multiples Method:
Assume that you are interested in valuing a Subway franchise that generates $500,000 in revenue and $75,000 in net income per year. You have gathered financial information about similar Subway franchises and have calculated the following financial ratios:
| Ratio | Industry Average | Subway Franchise |
|---|---|---|
| P/E | 15 | 20 |
| P/S | 1.5 | 2.0 |
| EV/EBITDA | 8.0 | 10.0 |
To estimate the value of the Subway franchise using the multiples method, you would apply the relevant financial ratio to the franchise’s financial performance. For example, if you wanted to use the P/E ratio, you would multiply the franchise’s net income the industry average P/E ratio:
Estimated value using P/E ratio = $75,000 x 15 = $1,125,000
You would repeat this calculation for each relevant financial ratio to arrive at a range of estimated values for the Subway franchise. In this example, the estimated value of the Subway franchise using the P/E ratio is $1,125,000, using the P/S ratio is $1,000,000, and using the EV/EBITDA ratio is $750,000.
Using this method, you would typically use a range of estimated values to arrive at a final estimate of the Subway franchise’s value, taking into account any additional factors that may affect the franchise’s value, such as its location, competition, and brand recognition.
3. Asset-Based Method:
The asset-based method involves estimating the value of the Subway franchise based on the value of its assets, such as property, plant, and equipment (PPE), inventory, and goodwill. This method is typically used when the Subway franchise has significant tangible assets.
To use the asset-based method, you would need to gather information about the Subway franchise’s assets and liabilities, such as its PPE, inventory, accounts payable, and debt. You would then subtract the franchise’s liabilities from its assets to arrive at an estimate of its net asset value.
This estimate would then be adjusted to reflect the fair market value of the assets, such as if the PPE has appreciated or depreciated since it was acquired.
Here’s an example calculation for the Asset-Based Method to value a Subway franchise:
| Assets | Amount |
|---|---|
| Property, plant, and equipment (PPE) | $200,000 |
| Inventory | $50,000 |
| Goodwill | $25,000 |
| Total Assets | $275,000 |
| Liabilities | Amount |
| Accounts Payable | $10,000 |
| Long-term Debt | $50,000 |
| Total Liabilities | $60,000 |
| Net Asset Value (Total Assets – Liabilities) | $215,000 |
| Adjustment for Fair Market Value | $20,000 |
| Estimated Value of Subway Franchise | $235,000 |
In this example, we start listing the Subway franchise’s assets, which include $200,000 in PPE, $50,000 in inventory, and $25,000 in goodwill. We then add up the total value of the assets to get $275,000.
Next, we list the Subway franchise’s liabilities, which include $10,000 in accounts payable and $50,000 in long-term debt. We add up the total value of the liabilities to get $60,000.
To calculate the Subway franchise’s net asset value, we subtract the total liabilities from the total assets, which gives us $215,000. However, we need to adjust this value to reflect the fair market value of the assets.
In this example, we estimate that the assets are worth $20,000 more than their book value, so we add this adjustment to the net asset value to get a total estimated value of $235,000 for the Subway franchise.
Factors to Consider in Valuing a Subway Franchise
When valuing a Subway franchise, several factors can influence its value. Here are some of the most important ones to consider:
1. Sales Revenue:
The sales revenue of a Subway franchise is a critical factor in its valuation. It’s the money that the franchise generates from selling its products and services. To calculate sales revenue, you can multiply the number of units sold the price of each unit.
2. Expenses:
Expenses are another key factor to consider when valuing a Subway franchise. These are the costs incurred to operate the franchise, such as rent, utilities, inventory, and wages. Subtracting expenses from the sales revenue can give you the net income or profit of the franchise.
3. Cash Flow:
Cash flow is the amount of money that flows in and out of the franchise over a specific period. It’s a crucial metric to evaluate the franchise’s financial health and sustainability. To calculate cash flow, you need to subtract the expenses from the sales revenue, plus or minus any changes in working capital and investments.
4. Market Conditions:
Market conditions refer to the overall state of the market where the Subway franchise operates. Factors that can influence market conditions include competition, demographics, trends, and regulations. It’s essential to evaluate the market conditions to determine the demand and supply of Subway franchises in the market.
5. Brand Value:
Brand value is the intangible asset that represents the value of the Subway brand name, reputation, and recognition. It’s an essential factor to consider when valuing a Subway franchise since it can affect its profitability, customer loyalty, and competitive advantage.
6. Methods of Valuation:
Once you have considered the key factors that influence the Subway franchise’s value, you can use different methods of valuation to estimate its worth. Here are the most common ones:
7. Asset-Based Valuation:
Asset-based valuation is a method that estimates the value of a Subway franchise based on its assets’ value minus its liabilities. The assets can include tangible assets like equipment, inventory, and real estate, and intangible assets like brand value and patents.
8. Income-Based Valuation:
Income-based valuation is a method that estimates the value of a Subway franchise based on its income or profit. This method uses a multiplier or a capitalization rate to calculate the present value of the future income streams generated the franchise.
9. Market-Based Valuation:
Market-based valuation is a method that estimates the value of a Subway franchise based on the price of comparable franchises sold in the market. This method uses the market multiples or the price-to-earnings ratio of similar franchises to determine the value of the Subway franchise.
In short, there are multiple methods to value a Subway franchise, such as the discounted cash flow, multiples, and asset-based methods. Each has its strengths and weaknesses and requires making assumptions about the franchise’s future performance. It is important to seek professional advice and carefully consider these assumptions to ensure an accurate and fair value is obtained.
