Franchise P/E

DEFINITION of 'Franchise P/E'

The expected value of new business opportunities available to a business. The franchise approach to evaluating a company breaks down the company's observed P/E into two primary components: the P/E coming from the company's business activities (base P/E) and the franchise P/E. In this sense, the franchise P/E = observed P/E - base P/E. It is a function of the rate of return on a business opportunity (the franchise factor) relative to the size of the opportunity (the growth factor).


Franchise Factor (FF) x Growth Factor (G) = (1/k - 1/ROE) x g/(k-g), where:

k = cost of equity
g = growth

BREAKING DOWN 'Franchise P/E'

The major factors determining the franchise P/E are the differences between the return on the new opportunity and the cost of equity. Investors should consider the growth rate and how long growth can be sustained, as well as the feasibility of the estimates (after all, they are expectations and not reality).

RELATED TERMS
  1. Franchise Factor

    The measurement of the impact on a company's price-earnings (P/E) ...
  2. Franchise

    A type of license that a party (franchisee) acquires to allow ...
  3. Franchiser

    A party in a franchising enterprise that ultimately owns the ...
  4. Forward Price To Earnings - Forward ...

    A measure of the price-to-earnings ratio (P/E) using forecasted ...
  5. Franchise disclosure document

    A Franchise Disclosure Document (FDD) is a legal document presented ...
  6. Franchisee

    The party in a franchising agreement that is purchasing the right ...
Related Articles
  1. Markets

    Diamond in the Rough? U.S. Franchises in 2016 (MCD, DNKN)

    Learn about U.S. franchise growth and direction for 2016 and how changes in wage standards and consumer preferences may endanger large fast food chains.
  2. Entrepreneurship & Small Business

    When Is A Franchise The Right Investment For You?

    Do you have the right mix of credit, capital and business savvy to make you an ideal candidate for buying a franchise?
  3. Entrepreneurship & Small Business

    6 Franchises That Are Cheap To Start

    These franchises are in the realm of financial reality for every-day people. Check them out to see if you'd like to run your own franchise.
  4. Entrepreneurship & Small Business

    Undervalued Franchises: The Best Choice?

    Searching for an undervalued franchise? Here's a quick guide to what's hot and what's a good bet.
  5. Entrepreneurship & Small Business

    Share The Wealth With Franchises

    Skip the first step and build off of someone else's successful business model.
  6. Entrepreneurship & Small Business

    5 Hot Franchises Right Now

    There are thousands of franchise opportunities to choose from, so getting down to a single option can take time.
  7. Financial Advisor

    What's The Best Franchise Investment For You?

    How do you figure out which franchise is the best for you and your budget? Read on.
  8. Investing

    P/E Ratio: Conclusion

    What have we learned about the P/E ratio? Although the P/E often doesn't tell us much, it can be useful to compare the P/E of one company to another in the same industry, to the market in general, ...
  9. Investing

    Is Stock With a Lower P/E Always A Better Choice?

    Is a stock with a lower P/E always a better investment than a stock with a higher one? The short answer is no, but it depends on a few things.
  10. Investing

    Most Expensive Franchise Fees

    Here are a few of the most expensive franchises available for purchase in the United States.
RELATED FAQS
  1. What is the difference between forward p/e and trailing p/e?

    Understand the difference between the trailing P/E ratio, which is the standard price-to-earnings calculation, and the forward ... Read Answer >>
  2. How can the price-to-earnings (P/E) ratio mislead investors?

    A low P/E ratio doesn't automatically mean a stock is undervalued, just like a high P/E ratio doesn't necessarily mean it ... Read Answer >>
  3. What does the forward p/e indicate about a company?

    Explore the forward price to earnings ratio and learn its significance and how it compares to the traditional price to earnings ... Read Answer >>
  4. What is the average price-to-earnings ratio in the oil & gas drilling sector?

    Investing in the energy sector provides an opportunity for value investors, but it is necessary to understand metrics such ... Read Answer >>
  5. What is the average price-to-earnings ratio in the financial services sector?

    Learn how to calculate and use the price to earnings (P/E) ratio when analyzing an investment and what the financial services ... Read Answer >>
  6. How can I calculate the forward p/e of the S&P 500?

    Learn how forward P/E is calculated for the S&P 500. Forward P/E is an important metric appropriate for changing market conditions. Read Answer >>
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center