The valuation of franchises : a restaurant case study

Thesis (M.Com. (Management Accountancy))--North-West University, Potchefstroom Campus, 2012.The objective of a business valuation arrangement is to reach a reasonable and acceptable opinion of value. Valuing a business entity has become less of a guessing game than before. Business valuations are two thirds science and one third art according to several theorists and practitioners. The result of a valuation is only definite if it can accurately predict the future, and given that it is not possible, there will always be an element of risk that the actual value differs from the expected estimate. There are several reasons why business valuations need to be performed. They can be categorised into three groups, namely transaction-based, tax-based, and litigation-based. Most business entities will require a business valuation at some stage. Business valuations can be categorized into different approaches and methods. The three approaches comprise the income based valuation approach, the market derived valuation approach, as well as the asset based valuation approach. Each one of these approaches has different methods that can be used under them. For the purpose of this research study, the methods used under the income based valuation approach are the discounted economic income valuation method and the direct capitalisation valuation method. The guideline publicly traded business entity valuation method and the merger and acquired business entity valuation method are used under the market derived valuation approach. When performing a business valuation under the asset based valuation approach, the asset accumulation valuation method and the capitalised excess earnings valuation method are used. In this research study a business valuation is going to be performed on a franchised restaurant, namely a Spur Steak Ranch. The particular Spur Steak Ranch that is going to be used is the Tampa Bay Spur. A franchise is a right granted to individuals or groups to market a business entity‟s products or services within a particular location. Franchising is a method of expanding a business entity on less capital than would otherwise be possible. The franchisee pays a capital lump sum to enter the franchise and accepts some of the running costs of its outlet. In addition, the franchise offers the franchisee the use of the franchise name and any goodwill related with it, the use of its business structures and support services, its product or service to sell, as well as management and staff training programmes. Franchising has become a dominant force in the distribution of products and services in several parts of the world. Any facility that prepares separate meals for eating on or off the premises falls under the title „„restaurant.‟‟ Not one restaurant is the same, and by producing meal experiences with unique characteristics, restaurants accommodate the requirements of particular customer categories. A restaurant is as much a financial entity as any other business entity. The most important elements in profitability in restaurants are economy and productivity. The franchised restaurant used in this research study is the Spur Steak Ranch which has been in South Africa for over 40 years. Allen Ambor, the founder and executive chairperson of Spur, is the person who started it all in 1967 when he invested R4,000 to open the Golden Spur in Newlands, Cape Town. Today, Spur restaurants are very popular for having play areas for children, thus, entertaining the whole family, making Spur a very popular fully-licensed franchised restaurant. The particular Spur Steak ranch used in this case study is the Tampa Bay Spur. The Tampa Bay Spur Steak Ranch is a family-oriented franchised restaurant, based on the widely known Spur concepts. The restaurant is owned by Lungisa Financial Administrators and is located in the Time Square Building, Dias Road, in Jeffrey‟s Bay. The restaurant spans in the region of 550m2 and can accommodate up to 180 customers. The Tampa Bay Spur was taken over by new owners in December 2011 and also completed a revamp that ended in March 2011. The research question and objective in this research study is to find out what combination of valuation approaches and methods seems to be the most reliable and accurate to value a franchised restaurant, particularly, a Spur Steak Ranch, and more specific the Tampa Bay Spur. To achieve this objective, five secondary objectives must be carried out. The first objective is to critically evaluate and compare popular valuation approaches and methods with each other. The second objective is to deliberate the advantages and disadvantages of each of the methods. Thirdly, to point out the uncertainty factors in valuations, for example, to calculate the discount rate by using the WACC or CAPM formula. The fourth objective is to develop an empirical case study based on actual information of a selected Spur (Tampa Bay Spur) and comparing different valuation approaches and methods with the original amount calculated by Spur after performing a business valuation on the Tampa Bay Spur. The fifth and last objective is to make recommendations regarding the valuation method used by the Spur. After performing a business valuation on the Tampa Bay Spur by using several valuation approaches and methods, calculating an average value from the different approaches and comparing it to the original value that the Spur calculated after performing a valuation on the Tampa Bay Spur, a conclusion can be made that the valuation method used by the Spur is fair and reliable. However, the method used by the Spur does not give enough insight for the buyer and seller to understand how they calculated the final value and needs improvement.Master