What's a franchise territory worth?
FSB's Anne Fisher explains how to calculate your area's value.
(FSB Magazine) -- Dear FSB: About four years ago I bought a franchise territory that gives me exclusive rights in three local counties. The business does decorative coatings on concrete buildings. I paid about $20,000 for all three counties but have developed only one, which has been very profitable. If I were to sell the other two, how much should I ask for them? Should the price be based on what I paid, or should it reflect their earnings potential (a much higher figure, assuming the buyer puts in the effort I have on the one I'm keeping)?
- Mark Simmons Franchisee, Concrete Technology Verona, Va.
Dear Mark: As with most franchising issues, you must first study the franchise agreement you signed upon buying the territory. "Does it let you transfer the two counties?" asks Terry Powell, CEO of Entrepreneurs' Source, a consulting firm based in Southbury, Conn., that advises franchisees. "Some agreements state that you can't divide the territory."
If it turns out that you can transfer your rights in two of the three counties, Powell says, "see what it would cost today to buy, from the franchisor, a territory about equal demographically to the two you want to transfer." He notes that four years ago you paid about $6,700 a county. "Let's say the franchisor is now charging new franchisees $12,000 for the rights to a like county. That's roughly what you could charge," says Powell.
No matter how well the third county does now - and what you assume about the promise of the other two based on that - he notes that it's illogical for anyone to pay you much more than what the franchisor is charging.
"But if no more territories are available in Virginia, you may be able to draw a slight premium," he adds. Powell also suggests that you see what your franchise agreement says about the transfer fee you'll owe the franchisor when you hand off the two counties. "It may be a flat fee, or it may be a percentage of the price" - usually about 10%.