There’s no doubt that AI is a powerful tool for aggregating data. It’s not surprising that more and more business owners are using it as a first step in deciding whether and when to list their franchises for sale.
We put an AI to the test by asking what my fictional UPS Store unit might be worth. Here’s what we discovered:
AI understands that valuation is more complex than calculating a percentage of revenue. That’s a place to start, so an owner will come away with a deeper understanding of which factors will affect your unit’s value. Our query (“How much is my UPS Store worth, with revenue of $850,000”) came up with a list of factors that determine value to buyers, including:
- • Seller’s Discretionary Earnings (SDE), which is used to measure the total annual financial benefit a single full-time owner-operator receives from a small business.
- • Net profit: Two units with the same annual revenue might have very different profit margins, based on rent, salaries, cost of goods, and other factors.
- • The owner’s salary: Some owners choose to take no salary from the business, while others use the company as their primary income source. The bottom line for the two units will differ significantly based on this issue alone.
So far, so good. An owner will at least know more about what matters to buyers, even if they’re not sure how to calculate the data.
AI was able to show franchise listings that might be comparable to our fictional store, with an important caveat. The return on our query returned listings we know exist and their current asking price. Again, AI did a good job of aggregating information from online sources. But the asking price doesn’t necessarily reflect the final sale price. The deals are private sales protected by Non-Disclosure Agreements, so only a broker involved with the franchise sale would have access to the final offer and closing price. Factors such as geography, sales, and profitability trends will affect the final transaction beyond this year’s gross revenue.
Sellers don’t always know what to ask to get an accurate idea of value. One factor crucial to determining what a buyer will offer is the franchisor’s requirements for upgrades. In 2020, The UPS Store announced its new “Blue Horizon” rebranding initiative (later referred to as “Laser Lite”). The makeover cost may be the franchisee’s responsibility and can reportedly range from $100,000 to $200,000. However, we refer parties back to the current FDD and franchisor to confirm the specific requirements and estimated cost. Whether upgrades are required—and when they must be completed—can depend on factors such as the store’s age, existing design, condition, remaining franchise term, and the franchisor’s requirements at the time of resale or renewal. We typically see higher valuation multiples for stores that do not require an upgrade and lower multiples for stores where the buyer will be responsible for completing one. However, the cost of an upgrade does not generally translate into an equal dollar-for-dollar reduction in value. Comparable sales should be analyzed to determine how the market has valued similar stores with and without upgrade requirements.
AI can be a starting point, but attracting buyers to your franchise requires human expertise and connections.
Franchise Clearly averages more than four offers per listing, and we have consistently delivered these results over the last few years. That’s because we’ve built a database of buyers who are looking for specific opportunities, and they’re ready to move when one comes up.
Packaging and marketing your franchise is both an art and a science, and a broker will understand how to attract and vet the most motivated buyers. When we talk to buyers, we tell them to lead with their highest and best offer; they understand that the seller has options and can simply move on to the next buyer or better terms. Having multiple bids for the business saves the seller time and resources they might otherwise spend negotiating with one buyer at a time.
That means that the number you get from your AI query might actually be lower than what a competitive bidding process could attract in price and terms. It’s not exactly the same as an online auction, but the end result is the peace of mind that you’ve received the best offer the current market will present.
Our advice is the same as you’ll get from any expert: start with AI, but end by consulting a human whose experience and judgment you trust.
