Feb 7th, 2008
Complex Valuation of Food Franchises - Court Adjusts Income Approach
Bertuca v. Bertuca, 2007 Tenn. App. LEXIS 690 (November 14, 2007)
Five years before this Tennessee couple divorced, the husband formed a partnership with his father to acquire and operate McDonald’s franchises in their mid-Tennessee region. The husband owned a 90% interest, but both partners had equal management rights, including any decision to sell. Their buy-sell agreement set a purchase price at book value; or, alternatively, the partners could liquidate.
A year prior to the divorce, the partnership acquired seven franchises for a total of $2.345 million. The partners financed $2.23 million and contributed $150,000. To raise his 90% share, the husband borrowed $124,200 from his father—a debt that remained outstanding at the divorce. The father, who owned/operated fourteen McDonalds through a separate entity, provided management services at no charge so that his son’s partnership could gain a foothold in the franchise business.
Pursuant to the particular franchise agreements, the McDonald’s Corporation owned the underlying real estate and rented it to the franchisee. Strict guidelines prohibited the sale of any franchise without McDonald’s’ consent. The partnership was also obligated to rebuild one of the franchises in its entirety, at an estimated cost of $950,000.
Battle of experts, with rebuttal on the side
The husband’s valuation expert was a CPA who represented fourteen McDonald’s franchises and had been involved in the sale of over 125. In his opinion, as of the valuation date, the partnership’s seven franchise were worth no more than the purchase price paid the year before.
To reach this conclusion, he first calculated the gross value of each franchise by using a multiple of free cash flow—which he testified was standard practice for valuing a McDonald’s franchise. Cash flow was determined from each operation’s net income during the prior twelve months and reducing it by interest expense, depreciation, amortization, and general/administrative expense. Multiplying this by a factor of five (4.5 to 5 was the standard for McDonald’s, he said), he reached the gross value. He added current assets and deducted current liabilities to arrive at a total net value for the seven stores of approximately $485,000. Given the partnership’s obligation to rebuild one restaurant and the husband’s obligation to repay his father’s loan, the expert said the marital interest in the partnership actually had a negative value.
The wife presented a CPA who was also a credentialed business appraiser and forensic accountant. Using a capitalization of earnings method and a 12% cap rate, he initially valued the partnership at just over $3.078 million, excluding debt. Applying cash flow figures supplied by the husband’s expert and the same general/administrative expense—adjusted downward for what he believed to be unnecessary expenses and excess profits—to reach a final value for the husband’s 90% interest of $1.671 million.
To rebut this value, the husband presented a CPA and managing partner of a valuation/litigation support firm who specialized in valuing McDonald’s franchises. This expert criticized the wife’s for using a 12% cap rate to reach a cash flow multiple of 8.33—higher than she’d seen for any sale of a McDonalds, she said. The preferred method was a discounted cash flow method (DCF); hers projected the income of each restaurant over seven years discounted by a 20% discount rate. Although her DCF indicated that the seven franchises had not appreciated beyond the purchase price, the partnership had $493,000 in equity. After applying a 20% discount for lack of marketability and deducting the loan to his father, she valued the husband’s 90% interest at $231,000.
Complicated valuation
Based on the three expert reports, the trial court valued the fast food partnership at $1 million, and the husband’s interest at $900,000. After awarding him the business, it ordered him to pay the wife $450,000 in equal monthly installments over seven years. The husband appealed, claiming the valuation was contrary to the evidence and failed to account for the buy-sell value and a marketability discount.
The appellate court found that a number of factors complicated this valuation, in particular the recent acquisition of the restaurants, their limited earnings history, and the need to rebuild one. The partnership earnings were also skewed by the father’s contributing his management services for free. In addition, there were problems with each of the primary experts. The husband’s expert applied excess depreciation and amortization. The wife’s expert failed to consider the cost of the rebuild. The rebuttal expert’s valuation conclusion was wholly dependent on the “appropriateness of the methods and assumptions” she used.
“In our view,” the Court said, “the preferred method of valuation would be to determine [the partnership’s] earnings using a capitalization of income approach.” How its interests appreciated to $1 million, as the trial court found, was “uncertain.” The parties were entitled to de novo (new) review, based on all the evidence—beginning with the net cash flow figures from the husband’s expert of $412,633. Adjusting for interest expense on the rebuild and excess depreciation, the Court reached normalized cash flow of $442,978. It used the 12% cap rate from the wife’s expert to reach a value of nearly $3.7 million. After adjustments for cash on hand and liabilities—including the obligation to rebuild—the Court found a value of $1.033 million.
Because this value approximated the trial court’s conclusion, its findings were left undisturbed. The Court declined to adjust for a marketability discount, because a sale of the husband’s interest was not “necessary or desirable.” Similarly, the buy-sell agreement did not affect the ultimate value conclusion because a sale was not planned or imminent.
business valuation methods…
That’s good that you are making such smashing knowledge just about this good topic. And we think that should be very good if people order the thesis abstract or buy dissertation from you.:)…
Hi
This is an quite interesting topic. I read it and found it more informative as this is related to our day to day life routines.This is a great article.
Thanks for sharing it.
Very interesting article and shows three approaches to Valuation. I faced a similar situation in a Valuation of 6 Subway restaurants. One spouse said they were worth a combined value of $260,000 with her credentialed professionsl, and I said they were worth over $1 million as a market value.
Judge was confused and taken aback at such a large discrepancy between the two experts and ordered a third Market based valuation opinion, which is sure to come in closer to 1 million….let us see the outcome
The Market is the true test. So I say, if possible, put it on the market, sell it and split the proceeds, or have one party match the offer instead.
Fayaz Karim, Franchise Valuations and cash flows
Fresh Healthy Vending Machines for Schools and Money for Schools. Fresh Healthy Vending donates up to $500 for each Fresh Healthy Vending Machine a school takes. Fresh Healthy Vending Machine Products meet or exceed all state nutritional guidelines.
fresh healthy vending reviewsFresh Healthy Vending Machines for Schools and Money for Schools. Fresh Healthy Vending donates up to $500 for each Fresh Healthy Vending Machine a school takes. Fresh Healthy Vending Machine Products meet or exceed all state nutritional guidelines.
Fresh healthy vending franchiseFresh School Healthy Vending Program has been introduced to ensure students of all ages have the opportunity to purchase Natural and Organic Healthy products through convenient and state of the art vending systems.
Fresh healthy vending machinesFresh Healthy Vending Machines for Schools and Money for Schools. Fresh Healthy Vending donates up to $500 for each Fresh Healthy Vending Machine a school takes. Fresh Healthy Vending Machine Products meet or exceed all state nutritional guidelines.
Fresh healthy vending machines Machines for Schools and Money for Schools. Fresh Healthy Vending donates up to $500 for each Fresh Healthy Vending Machine a school takes. Fresh Healthy Vending Machine Products meet or exceed all state nutritional guidelines.
Fresh healthy vending machines,business to training on the ins andouts of Fresh Vending’s products,Fresh Healthy Vending provides their franchisees with data to back up their claims when describing benefits. Detailed instruction and videos Free Delivery Online Reporting and Alerts Installation vending machines.
Fresh healthy vending locations finding places to install your machines is made easily accomplished via our heavily national database of schools, shopping malls, health clubs, hospitals and office buildings where new Fresh Vending machines can be successfully operated.
Fresh healthy vending Machines for Schools and Money for Schools. Fresh Healthy Vending donates up to $500 for each Fresh Healthy Vending Machine a school takes. Fresh Healthy Vending Machine Products meet or exceed all state nutritional guidelines.
Fresh Healthy Vending Machines for Schools and Money for Schools. Fresh Healthy Vending donates up to $500 for each Fresh Healthy Vending Machine a school takes. Fresh Healthy Vending Machine Products meet or exceed all state nutritional guidelines
Fresh vending franchise Fresh School Healthy Vending Program has been introduced to ensure students of all ages have the opportunity to purchase Natural and Organic Healthy products through convenient and state of the art vending systems.
Fresh healthy vending reviews Fresh healthy vending Machines for Schools and Money for Schools. Fresh Healthy Vending donates up to $500 for each Fresh Healthy Vending Machine a school takes. Fresh Healthy Vending Machine Products meet or exceed all state nutritional guidelines.
Really an awesome and an interesting piece of information shared, enjoyed reading the post a lot. Well done keep up the good work…..
Without doubt the information shared with in the post is pretty informative. Well done keep up your efforts….
Electric Cigarette
secure way to start a business, then it is wise to invest in Fresh Vending franchises,committed to assisting locations across the US provide healthy snacks conveniently Fresh Vending machines have succeeded in a host of common areas across the country .
vending services isn’t something you’ve got to tackle all on your own either. American healthcare is at the forefront of international news,Fresh Healthy Vending has to offer and do your part in making America feel better about itself committed to assisting locations across the US provide healthy snacks conveniently.
Fresh Healthy vending provide you Fruit Chunk Double Dippers – all that is needed for this early morning treat is a few pieces of fruit cut into chunks.Pleasant Parfaits – this tasty treat keeps in line with the combination of fruit, yogurt and granola.
fresh healthy vending reviews
fresh healthy vending
The new senate bill plans to bring fresh fruit juices, whole grains, dried fruits, and organic selections to fresh vending machines. Not only will these fresh healthy vending machines be available for children at schools, but they will also replace traditional vending machines found at sports venues, amusement parks, and movie theaters.fresh vending reviews
Fresh Healthy Vending products usually dictates that operators visit and restock,Fresh Vending machines have succeeded in a host of common areas across the country,Fresh Healthy Vending is committed to assisting locations across the US provide healthy snacks conveniently through state of the art vending systems.Fresh healthy vending machines
Students and workers can find alternatives to unhealthy vending machine snacks through companies like Fresh Healthy Vending. Fresh Healthy Vending uses a three prong approach to snack foods to make them nutritional, tasty and affordable.
Fruit juices are mostly packed with sugar, making the fresh fruit the better bet for the health conscious. Fresh healthy vending using vegetable juices are often tart to the taste and put a lot of people off drinking them. Combine the two, however, and you have a naturally sweetened drink that fills people up and contains a pound of fruit. The ingredients in fresh vending of Naked Green Machine, for instance, are listed as spirulina, chlorella, broccoli, green tea extract, spinach etc.Fresh healthy vending machines
Fresh Healthy Vending provide you breakfast,lunch & dinner recipes Muffin Breakfast Pizzas with Egg can be just what you’re looking for. Toast two whole grain English Muffins, lightly brush with olive oil and then top with a slice of tomato, some hard-boiled egg slices and then top with low-fat mozzarella.
fresh healthy vending reviews
fresh healthy vending
nice attempt .it show approaches to valuation which is indeeed intresting and informative both
Commerical Buildings for Sale
Fresh Healthy Vending - Locations, food franchise business, you will receive the help you need with advertising and promotion, invest in Fresh Vending franchises. After all, this brand is becoming more and more popular around the world.Fresh Healthy Vending program was developed to support businesses owners, employees, colleagues, friends and consumers in your community in making improved dietary choices.
Healthy School Vending Program fee was introduced to allow students of all ages have the opportunity to buy natural and organic products healthier by doing and the state of the art systems for machines.
Fresh Vending - Locations, food franchise business, you will receive the help you need with advertising and promotion, invest in Fresh Vending franchises. After all, this brand is becoming more and more popular around the world.Fresh Healthy Vending program was developed to support businesses owners, employees, colleagues, friends and consumers in your community in making improved dietary choices.
wonderful written by the blog owner & i appreciated your blog such a nice information in this blog for fresh vending review
Surely the importance of food and nutritions with in the daily diet of humans cant be ignored. A great post thanks a lot for posting….
Fresh Vending - Locations, food franchise business, you will receive the help you need with advertising and promotion, invest in Fresh Vending franchises. After all, this brand is becoming more and more popular around the world.Fresh Healthy Vending program was developed to support businesses owners, employees, colleagues, friends and consumers in your community in making improved dietary choices.
vending services isn’t something you’ve got to tackle all on your own either. American healthcare is at the forefront of international news,Fresh Healthy Vending has to offer and do your part in making America feel better about itself committed to assisting locations across the US provide healthy snacks conveniently.
Fresh Vending - Locations, food franchise business, you will receive the help you need with advertising and promotion, invest in Fresh Vending franchises. After all, this brand is becoming more and more popular around the world.Fresh Healthy Vending program was developed to support businesses owners, employees, colleagues, friends and consumers in your community in making improved dietary choices.
This is the best vending machines in schools and money for a new healthy schools. Fresh Healthy Vending donate up to $ 500 for each school vending machines have healthy fresh. Fresh and healthy vending machines meet or exceed all State Nutritional guidelines.
Dinar Inc is a global wholesaler of Iraqi dinar or dinar and supplies some of the largest financial institutions in the world with the currency. We are licensed by the Office of Financial Regulation.
Fresh healthy vending locations finding places to install your machines is made easily accomplished via our heavily national database of schools, shopping malls, health clubs, hospitals and office buildings where new Fresh Vending machines can be successfully operated.
secure way to start a business, then it is wise to invest in Fresh Vending franchises,committed to assisting locations across the US provide healthy snacks conveniently Fresh Vending machines have succeeded in a host of common areas across the country .
Fresh Vending - Locations, food franchise business, you will receive the help you need with advertising and promotion, invest in Fresh Vending franchises. After all, this brand is becoming more and more popular around the world.Fresh Healthy Vending program was developed to support businesses owners, employees, colleagues, friends and consumers in your community in making improved dietary choices.
Thanks a lot in going for and sharing information related to complex valuation of food franchises and the court adjusting income approach of a common Individual. Well done enjoyed reading as to what all you had to share.
secure way to start a business, then it is wise to invest in Fresh Vending franchises,committed to assisting locations across the US provide healthy snacks conveniently Fresh Vending machines have succeeded in a host of common areas across the country .
Fresh Healthy Vending products usually dictates that operators visit and restock,Fresh Vending machines have succeeded in a host of common areas across the country,Fresh Healthy Vending is committed to assisting locations across the US provide healthy snacks conveniently through state of the art vending systems.
vending services isn’t something you’ve got to tackle all on your own either. American healthcare is at the forefront of international news,Fresh Healthy Vending has to offer and do your part in making America feel better about itself committed to assisting locations across the US provide healthy snacks conveniently.
Fresh Vending - Locations, food franchise business, you will receive the help you need with advertising and promotion, invest in Fresh Vending franchises. After all, this brand is becoming more and more popular around the world.Fresh Healthy Vending program was developed to support businesses owners, employees, colleagues, friends and consumers in your community in making improved dietary choices.
secure way to start a business, then it is wise to invest in Fresh Vending franchises,committed to assisting locations across the US provide healthy snacks conveniently Fresh Vending machines have succeeded in a host of common areas across the country .