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Chapter 12. Harvest > Your Harvest Strategy and Valuation of the Franchise

Your Harvest Strategy and Valuation of the Franchise

For most people, the proper harvest strategy is closely aligned with the best valuation a firm can achieve. For example, venture capitalists in the United States prefer an IPO strategy because it addresses the largest market and typically secures the best valuation. Therefore, a very aggressive growth rate and a national or international rollout is a prerequisite for venture capital backing of a franchisor. In Europe, where the IPO capital markets are typically less robust, venture capitalists prefer trade sales in which the venture capitalist cashes out completely with lower transaction costs. The franchisor in Europe must have a clear vision of who will acquire it before it seeks venture capital backing.

Venture capitalists tend to rely on some multiple of earnings as a means to value both the franchisor and franchisee firms. But earnings have many definitions: net income, operating income, earnings before interest and taxes (EBIT), and earnings before interest, taxes, depreciation, and amortization (EBITDA). Current earnings provide an anchor to look into the future. Knowing what earnings measure to use and what the amount will be in the future is as much an art as a science for most firms. The firm’s valuation is larger when confidence in future earnings is high. Firms do sophisticated market research and financial projections to convince investors or buyers that they know what the future will look like. However, in franchising, development of the system provides a very rational roadmap to the future. This clarity is rooted in the performance of the individual unit and the scale potential of the system. When you have shown you can accurately project outlet performance, then the income stream is more assured. Greater confidence in the future income stream lessens the debate over valuation.


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