How to Calculate the PDV of a Franchise
The present discounted value (PDV) of a franchise refers to the value of a series of future payments for a predetermined period. The value is discounted to account for factors---time and investment risks---that can depreciate what a franchise is worth. In a franchise, the PDV refers to the expected fees the franchiser is to receive. These fees can include renewal fees, advertising costs, royalties, product margins, rebates and other potential sources of revenue so long as the franchisee stays with the company. These represent the present discounted value of a franchise.
Other People Are Reading
Instructions
-
-
1
Determine the franchise's anticipated life. As long as a franchise is in operation, it receives royalties and other fees from its investors or franchisees. To compute the PDV of a potential franchise opportunity, note how long the franchise is expected to stay open. Based on the performance of the franchise, start with an average failure rate it can have. For instance, if a business has a failure rate of 10 percent in a particular year, then you can assume that its anticipated life is 10 years (1 divided by 0.10).
-
2
Based on the franchise reports, estimate the average revenue of the franchise. From a franchiser's point of view, this value can increase over time, so create a financial model that will factor in all the revenue that the franchiser will expect from the franchisee throughout the agreement. Create one entry of projected revenue for each year to make things simple. For instance, if the life of the franchisee's agreement states five years, anticipate sales for the next five years.
-
-
3
Deduct the expenses incurred for signing up a franchisee. These fees will include marketing, commissions and such expenses that have anything to do with selling a franchise. Subtract the cost of the products that will be sold to the franchisee. Account for all overhead expenses for the franchise. Deducting all these will give you your expected profit for that given year.
-
4
Identify the discounted rate. The discounted rate of the franchise will be provided by the franchiser. This refers to the rate of the return on your investment. This will be the percentage of the amount of how much you stand to gain after a certain period given your investment on the franchise.
-
5
Calculate the present discounted value for each year. Follow this formula for calculating given the values that you have arrived at for every year in the life of the franchise agreement:
PDV=______FV________
(1-Discount Rate)n
Where: PDV -- present discounted value, FV -- projected profit for the given year, n -- year.
For instance, if your projected life span for the franchise is five years, you need to apply this formula five times (for years 1, 2, 3, 4, and 5). Take the sum of the PDVs from all five years and you'll get the net value of the franchise.
-
1
Tips & Warnings
The PDV of a franchise allows you to determine whether or not you're making a sound investment move. If the total PDV of the franchise throughout its lifespan is not significant enough to give you a good return on your investment, then it's not worth the trouble. Invest in a franchise that will give you a favorable return later on.
