A common question asked by prospective franchisees that are reviewing a franchise opportunity is, “How much money can I make?” In response, the franchise salesperson often avoids the question and assures you that you will have an opportunity to review the disclosure document and speak with franchisees. When you subsequently get the disclosure document you go to the earnings section and are faced with a statement that reads similar to the following: “The Franchisor does not give or authorize its agents to make any oral or written representations or estimates concerning the actual or potential sales, costs, income or profit of a franchise.”
Franchisors can make earning claims provided they can be verified and substantiated. Some franchisors today provide average gross sales figures of their franchisees and may have clear earning claims in their disclosure, but several do not offer these numbers.
Don’t be discouraged! The solution is to do your homework…
The issue of reliable sales figures has been diluted with COVID and a confusing economy. High traffic downtown locations that were once successful have over the past two years experienced minimal sale volumes as employees work from home. Some locations have introduced delivery. Sales in locations have changed.
Several franchisors find that the variance in earnings recently so great that making any kind of a reliable claim is difficult. Some franchisees are more creative than others in posting expenses, making it difficult for the franchisor to compare statements. Other factors influencing earnings include the franchisee’s management ability, government subsidies, operating efficiencies, competition, the local economy and other local factors. With new franchisors, there is simply not enough of a track record to go on.
How can you be expected to make a business decision and invest in any business when you are not provided with potential returns? This issue comes further to the forefront when you go to the bank, and they ask you for a business plan with projections as part of approving your loan. They are looking for evidence that the business will be able to pay off the loan. Without this they are reluctant to lend you funds.
The solution is to do your own homework and do location specific projections based on the realities of the time and your market. Take the time to develop your own spreadsheets. Or if you are not detailed oriented, work with an accountant.
Put together a 36-month spreadsheet that captures all the income and expenses related to the business. Then start to fill in the blanks. You will be more informed and make a better decision than if you just blindly believed whatever the disclosure or franchisor representative tells you. The cash flow projections that you put together will become an invaluable management tool once the business is opened, allowing you to quickly see when you are on track and providing benchmarks that require seeking answers and making changes so that your profitability is achieved. Finally, you will have a better sense of your working capital needs during the startup phase of the business.
Expenses will vary from market to market. Find out what the labor salaries being paid in your community are. What are the rents? Your local chamber of commerce or economic development department may be able to assist. An accountant can also provide valuable insight. Speak with franchisees and ask them for their input. Show them your list of expenses and ask if they see any expenses that you may have forgotten. What are their monthly expenses? Were there any expenses that were a surprise to them after they opened? What expense have they found to be the most difficult to manage?
Then there is the issue of sales. Asking a franchisee,” How much money do you make?” may not always provide you with the information you are looking for. To ask them this question directly may make them uncomfortable. Alternative questions that will often generate the answers you need are as follows:
- What is your monthly inventory turnover? What is your markup or margin? (retail)
- What is your average check and customer count per day? (restaurant)
- What are your average billable hours, and what is your average hourly rate? (service)
- How long did it take to get your business to break-even and then profitability?
- What is the seasonality? Monthly sales high? Monthly sales low?
- How slow does it get during the off-season?
- How do you adjust your expenses during the slow months?
After you have prepared the cash flow projections, forward your numbers to a few of the franchisees and the franchisor to get their input. Franchisees can provide direct input. The franchisor will be careful not to state if they are right or wrong but can review and see if there are any errors or major expenses that are missing. They can direct you on where to continue your due diligence. They have a desire to ensure that you are coming into the franchise with realistic expectations.
Put together two cash flow projections- a best case scenario and a worst-case scenario. Plan for the best but be prepared for the worst. This will allow you to sleep at night.
No matter how detailed your projections, there will be no guarantees. There are some great opportunities today as we come out of COVID and things return to a new normal. But the economy could change again. Review your projections regularly and be prepared to make changes and adapt as circumstances evolve.
Wayne Maillet is a franchise management consultant and founder of the consulting company Franchise Specialists. Respected within franchise circles, he brings a realistic, practical understanding of business and franchising. This article is based on excerpts from his book, Franchising Demystified. The book can be ordered through most book retailers or directly from the publisher at www.franchisingdemystified.com .