Although I've categorized this factor as a "negative", it can equally be viewed as a positive. As a franchisee, you want to know that your franchisor is not going to allow its franchisees to damage reputation of system in which you've invested your hard-earned dollars.

-> Pay initial franchise fee and purchase price

There may be an initial investment ranging from a few hundred to tens of thousands of dollars to buy into a franchise.

-> Pay ongoing royalties

In addition to initial franchise fee and purchase price, most franchisors will also charge an ongoing royalty for rights to use franchised system. These royalties are usually calculated as a percentage of turnover but various other fee structures exist.

-> Restrictions on ability to sell business

Some franchise agreements can restrict quite severely your rights to sell your business to another franchisee. They may impose strict criteria for proposed purchasers and you may find it difficult to find buyers who meet this criteria.

-> May not be able to realize value for business on termination

Some franchise agreements state that upon expiration or termination of franchise agreement, goodwill of business reverts to franchisor. This means you may have operated and developed a business over many years and yet, when franchise agreement expires, you effectively walk away from business with no further financial compensation.

Under this type of arrangement you must understand going in that you are expected to derive your financial return during term of franchise agreement by way of annual profits, not by way of a capital gain at end of franchise term.

WHAT TO LOOK FOR IN A FRANCHISE

-> An established franchise system with a good reputation.

-> Comprehensive training systems for both your own management team and other employees.

-> A relatively harmonious relationship between franchisor and franchisees. Some friction from time to time is inevitable in any long-term business relationship but a constant atmosphere of hostility, mistrust and long-running disputes can be a warning sign of an unstable system.

On other hand, if you're looking at a franchise system of any significant size, a completely harmonious relationship between franchisor and franchisee can be a signal that management of franchisor is weak. Although a weak management team on franchisor side may translate into short-term personal benefits for franchisees, in long-term it undermines stability and foundation of franchise system itself and, ultimately, value of your investment.

-> Ethical business practices both by franchisor and existing franchisees.

-> An inclusive "partnership" approach on part of both franchisor and franchisees. This does not mean that franchisor should not impose controls on system but you should look for a spirit of goodwill and cooperation, willingness to listen to others' ideas and a climate of open communication at all levels throughout organization.

-> Exclusive territories - although not crucial, exclusivity of territory (where franchisor grants you a limited but exclusive territory which is yours alone) can in some cases be a relevant factor to competitiveness of business. It would be fair to say that it does not benefit franchise system if franchisees are forced to compete with each other for limited business.

These are just a few of major factors you should take into consideration when deciding whether a franchise is for you. Although franchising minimizes risks of business failure, it cannot not eliminate them entirely and any decision to proceed with a franchised business should only be made after a thorough reading of franchise agreement and accompanying disclosure documentation and obtaining professional advice of both your lawyer and your accountant.

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9. Rule of Thumb Methods

These are rough guides based on industry averages. Many industry organizations have developed methods for their particular industries. They are highly unscientific and hardly rigorous but act as a good "gut-check". You certainly wouldn't use them on their own but they can be useful to check that value you've arrived at using a more scientific approach is in ballpark.

10. Tangible Assets (Balance Sheet)

This method is basically a value of business's current assets and nothing else. Typically used where business is losing money. This approach will usually be utilized when selling business is just a matter of getting best possible price for equipment, inventory and other assets of business. A good strategy is to approach other firms in same business that would have a direct use for such assets.

11. Multiple of Earnings

A multiple of cash flow of business is used to calculate its value.

12. Value of Specific Intangible Assets

The value of business is based on how much it would have cost buyer to generate intangible asset. Typically used where specific intangible assets that come with business are highly valuable such as a customer base. Customers with a high likelihood of being retained are valuable in most industries.

The most appropriate valuation method for you depends very much on nature of your business. If you manufacture widgets, for example, you'll want to use asset valuation method. If you offer website design services, on other hand, you'll want to use capitalization of income method instead. If you're selling a web- based business where major asset is your high traffic volume and/or list of ezine subscribers, you will probably want to use value of specific intangible assets method, such as 10 cents per subscriber (or whatever going rate is).

Is more than one valuation method applicable to your business? If so, calculate value of your business in accordance with all of them and see which gives best result (i.e., highest value). Another good approach is to average your calculations to get a reasonable ballpark figure.

Whichever method you choose, understand it inside out so that when time comes, you can authoritatively justify your asking price to potential buyers. Pulling a figure out of thin air without any substantiation whatsoever is much less impressive than being able to say, with confidence, "I worked with my advisers using a number of different methodologies to value business. We adopted value of specific intangibles method because backbone of business is our large, loyal ezine subscriber database. We also calculated it on basis of capitalization of income, which yielded a similar value. I can show you calculations if it will help you see where number comes from."

By following this approach you may not necessarily get value you are after (for this reason, many sellers artificially inflate their asking price so they have room to be negotiated down), but at least you have a solid starting point for negotiations and are much more likely to be able to negotiate a price both buyer and seller are able to live with.