Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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In essence,the valueof a franchise is directlytied to the
capacitytogenerateexcessreturns.Anyactionoreventthat
affects these excess returns will affect the value of the
franchise.


Special Issues in Valuing Franchises


Buying a franchise is often a mixed blessing. While the
franchisee gets the backing of a well-known firm with
significantresourcestobackuphisorherefforts,thereare
somecoststhatmayaffectthevalueofthefranchise.Among
these costs are the following:



  • Theproblemsofthefranchisorcanspilloverintothe
    franchisee.Forinstance,whenDaewoo,theKorean
    automaker,borrowedtoomuchandgotintofinancial
    trouble, its dealers around the world felt the
    repercussions. Similarly, McDonald’s franchisees
    aroundtheworldwerepicketedbyantiglobalization
    activists.Thus,anefficientand well-runfranchise’s
    valuecanbe affectedbyactionsover which ithas
    little or no control.

  • Sincefranchisors tendto be largecorporationsand
    franchisees tend to be small businesspeople, the
    formeroftenhavemuchmorebargainingpowerand
    sometimestakeadvantageofittochangethetermsof
    franchiseagreementsintheirfavor.Franchiseescan
    increase their power by banding together and
    bargaining as a collective unit.

  • Thevalueofafranchisederivesfromtheexclusive
    rightsitgrantsthefranchisortoselltheproductsofa
    firm. This value can be diluted if a franchise is
    grantedtoacompetitor.Forinstance,thevalueofa

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