Are food franchises worth more or less on resale?

A newsletter we received from a business broker this morning suggested that resales of hospitality businesses are picking up again now that the return of working holiday visitors is reducing staffing issues and the removal of Covid restrictions has led to an instant rise in revenue. ‘We have seen a drastic rise in buyers also looking for cash flow with the increase in interest rates and the change from other investment sectors such as residential rentals,’ report James Sheppard and Jeff Wiley of ABC Auckland Hospitality.

The newsletter goes on to suggest that, unusually, franchises are attracting lower multiples on resale. The figures quoted show cafés selling for 2.3 to 2.8 times EBPIDTA (Earnings before proprietor, interest, depreciation, taxation, amortisation), bars at 2.6 to 3.2 times, and takeaways at 1.5 to 2.2 times. Meanwhile, franchises are quoted as selling for a factor of only 1.8 to 2.8 times EBPIDTA.

Of course, franchises cover a much wider range of businesses than just hospitality businesses, with industries such as home services potentially reducing the average – it’s worth noting that the franchised hospitality businesses quoted in the same newsletter have multipliers of 2.75 to 3.0. But in case hospo franchisees are worried about the value of their businesses, we asked Nick Giles, Head of Hospitality at LINK Business Broking to comment.

Resilient market

‘There have been some strong views in the market over recent times,’ Nick says. ‘Over the last six months, in particular, many have suggested that market prices for hospitality businesses have dropped significantly. 

‘This is simply not the case. There have been some deals to be had out there, there is no doubt about that, and this has skewed the results and thinking of some in the Industry.  Some owners have come through the worst of the pandemic and decided to simply cash up and ship out, which is understandable. There has also been immense pressure on vendors from many angles this year from sickness to staff shortages and from rising prices to the slow bounce back of tourism.  

‘However, the market has shown itself to be highly resilient. Through the GFC of 2008/2009, when I started in hospitality business sales, it was the hospitality industry that kept the wheels moving in terms of business sales, and prices held firm then. 

‘A big difference between then and now is that the hospitality landscape has changed. It used to be very much divided into sectors: simple cafés, cafés with liquor licences, restaurants, franchise food businesses, takeaways, bakeries, bars, etc.  The market had very different views of these individual sectors and there was some confusion in pricing businesses. These days there is far less differentiation. Cafés have become more like restaurants and vice versa, so people are asking: “Why would I pay a markedly different price for two hospitality businesses making exactly the same profit?”  It is far too simplistic to say, ‘Because one is a bakery and one is a licensed café, or a restaurant, or a bar.” 

The factors that count

‘It is other factors that play the major roles in determining whether the price of two businesses are different such as barriers to entry, or the strength of the lease, or how much the public associate the owner with the business. These are the factors that really determine prices – not whether something has a liquor licence or is open longer hours. The label matters actually very little.

‘A strong caveat to this, however, is around franchise businesses in the hospitality sector. The market has always shown a preference for franchised businesses and prices tend to reflect that.’

Dawn Engelbrecht, Business Broker & Franchise Specialist at LINK sheds more light. 

‘The comfort factor and sense of belonging to something that comes with a franchised business has always been a strong draw for potential buyers. The fact that the hard yards have gone in to making a successful brand and creating systems that work is valued by the buying public and prices have always reflected this. Strong brands create strong demand in business sales and this demand creates a stronger ultimate price for a business – that hasn’t changed. 

‘Interestingly, there are certain types of franchise hospitality businesses that attract slightly higher premiums than others. Much of this is to do with the simplicity of some of the systems and the relatively low barriers to entry.  Franchising remains a strong part of the NZ economy as supported by the 2021 Survey of Franchising by Massey University, which shows that the franchise sector here is worth $36.8 billion - $58.5 billion if you include motor vehicle sales and fuel retail!’

There’s more information about challenges and trends in the food biz in the latest issue of Franchise New Zealand magazine – to read our current issue, send for a free print copy or read the digital edition now.

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