Business Franchise June

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Richard Watson muses on what your
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HENEVER DRAGONS’ DEN or American Inventor for the goodwill? Few prospective business owners fully understand the
appears, I think back to my first business venture, begun principle behind the goodwill element of an operating franchise.
at the tender age of 21. It might help if we take the fairy tale of the Goose which lays the
My friend Max was a wizard engineer but still failed to fully secure Golden Egg. If we assume that every egg would sell for £5000, then we
the 60-ton press as he left the shop floor for lunch. During his absence need to ask what is the actual value of the goose.
the press suddenly revolved, crushing a worker’s fingers. As a means of producing an income of £260,000 a year, what price
After a career of 40 years, Max chose to resign. Shattered by the turn would you be willing to offer the owner?
of events and with no job or income, he retreated to his garage. His You would need to have a number of questions answered.
home resounded to the sound of metal being hammered and drilled. How old is Goosy Goosy Gander? Is she in rude good health? Has
After six weeks he rang and asked me to call. In his garage stood a she always laid a Golden Egg every single day? How long will she live?
machine whose purpose eluded me. The only similarity to Chitty Chitty What does she cost to keep?
Bang Bang was that it sported four wheels. It was loosely based on the You will then make a guess at the number of eggs you may expect to
remains of his lawn mower, with additional parts scavenged from his produce and offer the owner a share of that future income to purchase
childhood Meccano set. the asset.
Max picked up a length of aluminium rod, pushed it into the machine Goodwill is defined as the premium offered by the buyer, above the
innards and pulled on a long handle. The wheels revolved and into a actual ‘book’ value of the assets.
wicker clothes basket dropped a fully formed boy’s catapult.
You were probably one of the thousands of kids across SO WHAT’S AN EXISTING FRANCHISE WORTH?
the country who saved their 75p to buy his ‘Acme’ thumb The truth is that a franchise, like any other business, is worth only
bruiser catapult. Max pulled and pushed the handle, what someone is willing to pay. My home is worth £250,000 in
making 50 pence profit each time. The faster he worked the its quiet Worcestershire lane - but would command £7 million if
faster he made money. The machine cost Max £210 and located on that London lane that runs between Hyde Park Corner
was an instant money-maker. and Grosvenor Gate. Where, when, and how the business
After three years I offered Max £21,000, bought operates determines the value.
his business, cleared my garage and pulled the handle When buying any business, you are not just investing
ever faster. Max used my money to pay for surgery in what you can see, touch, or hold. What you are
on the workers injured hand, proposed to her, then really into is buying the parts of a ‘machine’ that will
retired with his new wife to a perfect seaside bungalow produce a healthy return on your investment.
in Norfolk and never worked again. When buying a franchise ask to see a copy of the
Max and his wife were happy, I was happy, thousands previous profit and loss account and balance sheet.
of kids were happy. The only one unconvinced was In general the ‘goodwill’ cost of a franchise, would probably
my father, who could never understand why I would calculate out at 1.5 times the pre-tax profits.
pay 100 times the asset value for a business with no Let’s imagine that you are considering buying a franchise
premises, hardly any stock, one machine and a long which generates a net profit of £36,000 each year.
list of customers. Using the formulae of 1.5 times net profits, you would
How come was I more than happy to pay £20,790 be prepared to offer up to £54,000. If the equipment,
June 2008 www.businessfranchise.com
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