What FRANdata Thinks

Valuation of Personal Service Franchises

September 19th, 2019 by Meme Moy

We’ve been receiving quite a few requests for business valuations of personal service franchises, which includes names such as Massage Envy, Hand & Stone, and European Wax.  Although they are 3 different franchises, they have much in common.  Before we get to the “comps”, here are the primary areas that we analyze when valuing one these franchises:

Revenue Trend

Our earliest comp for Massage Envy came in 2007.  By 2010 we had completed 15 valuations for the franchise and to date, we have valued nearly 50 locations.  Over the last 3 years, we’ve noticed declining revenue in same store sales.  Declining sales for ME franchises have mostly been due to 3 areas…(1) cannibalization of the market by new ME stores, (2) bad press in 2017 due to accusations of sexual misconduct, and (3) competition (similar concepts entering the market).  Average sales per location for ME is approximately $1.2mm where Hand & Stone appears to generate slightly more (around $1.5mm).  Although revenue “trend” is an indicator of value, cash flow is KING when it comes to business valuation.


The primary driver of company value is cash flow to the owner.  Small businesses typically sell based on their “seller’s discretionary earnings” or “SDE”.  This is calculated as earnings before interest, taxes, depreciation, and amortization (EBITDA) plus owner’s salary, benefits & “perks”.  The higher the SDE, the higher the value.  Franchise owners should not only focus on top line sales, but more importantly efficiency and overall profitability.

Cash Flow Adjustments

As owners plan an exit strategy, one of the first strategies to increasing the value is cleaning up the financial statements.  Many small business owners try to limit tax liability by expensing discretionary or non-operating items.  I suggest consulting with the franchise owner to limit these expenses at least 2 years prior to sale.  Although many brokers will “add-back” these expenses to cash flow, it’s proven that clean financial statements tend to bring higher multiples / values.

Gift Certificate Liability

One item overlooked in an acquisition of a franchise service business is how gift certificate liability impacts value.  Gift Card sales are a continued source of revenue for Massage Envy and similar franchises nationwide. Most locations typically experience an increase (seasonality) in Gift Card/pre-paid services during the holiday season. In continued discussions with owners, franchisors and consultants, it has been established that nearly 30% of all gift card purchase are never redeemed. Also, the variable cost associated with gift card purchases are conservatively 40% of revenue.  This will be different for every franchise but is a starting point to calculate the true gift card liability.


As shown above, although different franchises, they have similar margins and similar “value multiples”.  Cash flow multiples are nearly exact.  There is some variance in price to revenue multiples, but again, they are relatively consistent.


In summary, although personal service franchises may have somewhat different business models and overall “concepts”, they are usually valued the same.  After reviewing a few dozen ME transactions, I can say that multiples of cash flow are falling…and newer concepts are seeing higher multiples.  However, in the end, cash flow is king and will ultimately impact value.


About GCF Valuations
GCF Valuation was founded in 1997 and specializes in providing business valuation services to small and mid-market businesses.  GCF provides valuations to hundreds of national, regional, and local lenders for SBA loans.  GCF also works closely with national franchise groups providing valuations for individual and multi-unit stores nationwide.  Steve Mize is the founder and managing partner of GCF Valuation, and is an Accredited Senior Appraiser (ASA), in Business Valuation. For more information click here

Archived by Category