What should trade at a higher multiple: a fast food chain that owns its stores or franchises?
That's it. That's the question.
What should trade at a higher multiple: a fast food chain that owns its stores or franchises?
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Franchises because they produce royalty like cash flows without the same amount of capital intensity in an store owned model
Franchisors trade higher multiples than franchisees. Asset-lite business model with very low capital intensity and very little fixed costs. With that said, a well operated multi-unit franchisor can generate much higher quantum of actual EBITDA / cash flow than a franchisor can.
Assuming trading on EV/EBITDA
If they own their stores they Depreciate them, if they franchise, they expense them. So by expensing the cost of franchising stores, you have a lower EBITDA than if you were to own the stores. Thus, you would have a higher EV/EBITDA if you franchise the stores.
Hopefully you're joking
no return offer for u
+1 for effort, -10 for content
There's a bit of confusion here, it seems. Just to make sure we're on the same page, we're differentiating between a fast food chain owning its stores and an enterprise operating a fast food chain as a franchisee of a franchisor. The franchisor itself is out of the scope of the question.
If my understanding is right, it becomes a matter of scale. The bigger you are, the better the multiple for the chain owning its stores because (i) your gross margin does not include royalty fees to the franchisor, (ii) you're not a price taker from the franchisor who could increase fees anytime they want and (iii) you own your IP and marketing effort (which is a double edged sword). The franchisee is at the mercy of the franchisor most of the times, which is an advantage when small (get access to best practices, little to no marketing effort which reduces CACs) but can become a problem with scale.
Put differently: the more successful you are as a franchisee, the stronger the incentive of the franchisor to squeeze you. Not the case if you're growing on own stores (though arguably tougher to do).
That said, the best position to be in is the franchisor, for reasons mentioned already (low capital intensity, excellent cash generation, etc.)
Agree with most comments. But I don’t think it’s necessarily true that larger franchisees are at a disadvantage vs. smaller franchisees. If you’re a critical franchisee in the system, the franchisor actually can’t dick you around by raising royalties willie-nillie. Typically at this point you might have negotiated a put/call agreement to just contractually put your franchisee biz to the franchisor at a pre-agreed multiple. You can also negotiate under-market royalty rate given your negotiating leverage with scale. Your actual earnings might be much heftier than the franchisor in dollar terms. In general, there is no free lunch and the concentrated risk you take by being the large franchisee gets rewarded by the franchisor looking out for you. Not many franchisors can afford to have a reputable franchisee going around the market saying that you suck and move to another brand
Owning the real estate attracts the lower real estate multiples as opposed to a simple light consumer business
You've got it flipped. Owning the real estate means you should trade at higher multiples - real estate multiples are very high as are generally any AssetCos. If you have real estate, chances are its valued at 13-20x - so sale-leaseback those assets, and now you have a simply light consumer business with a crapton of cash on your balance sheet.
Depends on scale and growth - CMG trades at a premium to MCD because of its growth. If equal growth: the higher the franchise mix, the higher the multiple. Look at JACK who acquired Del Taco (higher % of company-owned stores) and their multiple compressed. If they refranchise the multiple will expand which is a very common strategy in the space.
Depends if the franchisor figured out how ABS works or not.
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