Burger King franchise may be diluted if another
BurgerKingisallowedtoopenfivemilesdownthe
highway.Final Thoughts on Franchise Valuation
Itisnotdifficulttovaluefranchisesusingeitherdiscounted
cashfloworrelativevaluationmodels.Withdiscountedcash
flow valuationmodels,thekey challenge isestimating the
incrementalcashflowsassociatedwithowningthefranchise
as opposed to operating the same business without a
franchise. When valuing a Burger King franchise, for
instance,this wouldrequireestimatingthecash flowsfrom
operatingaBurgerKingasopposedtoarestaurantwiththe
same menu but no franchise name attached to it. These
incrementalcashflowswillbediscountedbacktothepresent
at a risk-adjusted discount rate, reflecting the risk of the
business the franchise is in, to arrive at a value for the
franchise.
Withrelativevaluation,wewoulddrawonthetransactions
pricesatwhichfranchisesareboughtandsold.Withwidely
heldfranchisessuch asMcDonald’s,we shouldbe ableto
replicate what we did with stocks, which is to compute a
valuation multiple (franchise value/sales) based on recent
transactions and use it to value a particular franchise.
FIRMWIDE CASH-FLOW-GENERATING INTANGIBLE
ASSETS
Theintangibleassetsthatattractthemostattentionandhave
thegreatest valuetendto be difficultto isolate and value.
Theydonotgeneratecashflowsontheirown,buttheyallow