I want to talk a little bit about business valuation, specifically when you’re buying an existing franchise location—and how to avoid one of the biggest traps buyers fall into: paying for future potential instead of proven performance. https://youtu.be/Yu1xkgI8X9I
The Franchise Valuation Case
I was recently hired to evaluate a franchise restaurant that was for sale.
When I perform a business valuation, I start by normalizing the income statement to calculate Seller’s Discretionary Earnings (SDE)—the total cash flow available to an owner-operator.
That SDE needs to be enough to:
Pay the owner a reasonable salary
Cover any loan payments for the purchase
Provide a return on the buyer’s investment
Cover CAPex needs as machinery and equipment wear out
Once I have that SDE, I compare it to data from hundreds of past business sales—properly normalized and tracked by the International Business Brokers Association (IBBA).
In this case, the restaurant’s cash flow supported a valuation of about $175,000. That represents the enterprise value—the business plus its inventory, working capital, and equipment, but not including real estate (since it was a leased location).
The Problem: Renovations and “Future Growth”
Because it’s a franchise, there were some obligations tied to the sale.
The franchisor required the new owner to complete a $100,000 renovation and pay a $30,000 franchise fee for the latest décor and menu updates.
The seller and their broker claimed these upgrades would increase sales by 20%—and therefore, profits would rise too.
So, they were asking for $150,000 for the business, plus the $130,000 investment for the upgrades.
What the Buyer Was Really Paying For
Here’s the thing: the only thing we know for certain is the cash flow that exists today.
If you agree to pay for the business plus invest in renovations because someone told you sales “should” go up, you’re essentially paying the seller for your own hard work and risk.
That’s not smart buying.
As I always teach in my business buyer seminars:
You pay for what you get. You buy for what you believe you can create.
But you never pay the seller for the future potential that you have to deliver.
The Reality Check
So I told my client:
If the cash flow supports a value of $175,000, and you have to invest $130,000 after buying it, your offer should be $175,000 minus $130,000 — or roughly $45–50K.
He made the offer.
And of course, the seller said no.
The business has now been sitting on the market for over two and a half years because nobody is willing to pay for blue sky.
“But I’ll Benefit From the Renovation…”
My client asked a fair question:
“Shouldn’t I pay a bit more since I’ll benefit from the renovations?”
Here’s the logic I shared:
If those renovations truly guaranteed higher sales and profits, the seller would have already made them.
They’d spend the money, see the higher profits, and then sell the business for a higher price.
But they’re not doing that—because they know it’s a gamble.
They want you to take on that risk and pay them as if the results were already proven.
That’s not how smart buyers think.
The Bottom Line
When evaluating a franchise (or any business), pay for the results that exist today, not the story of what “might” happen tomorrow.
If a franchisor or broker is trying to sell you on “potential,” remember: Potential is free. Proven cash flow costs money.
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