Working out how much money your franchise will make


Money down drain

You can minimise the risk that comes with starting a new venture by buying a franchise with a proven sales model. However, if you’ve never bought a franchise previously (and most buyers don't) then how can you judge it's profitability?

The answer lies in a fact-finding mission in regard to the financial aspects of your potential business. In other words: do your homework!

Past performance

Firstly, ensure you understand how much it will cost to set up in business.

This isn’t just the purchase price: it needs to include the cost of any stock, equipment, licensing, transport and IT systems. Also include any costs arising from initial and ongoing training of yourself and any staff you plan to employ.

Secondly, as past performance is the best indicator of future success, it’s essential that you look back at the sales history of the franchise you are buying.

Hire an independent accountant. It’ll be a small outlay compared to the thousands you might waste making a mistake through not hiring one.

If you’re considering buying a virgin territory then ask the franchisor for the profit and loss accounts of similar sized areas. Don’t forget that your future income may be slightly less that other franchisees on account of the learning curve you’ll experience.

Financial forecasts – which the franchisor will provide you with – are useful, but remember, they are only estimates, and not as valuable as the hard facts contained in the profit and loss accounts. Keep in mind that any forecast could be unrealistic or may have even been bolstered to encourage you to buy the franchise.

Lifestyle

Thirdly, it’s likely you’ll need to borrow a proportion of the cash required. Work out how much you can afford and how much you need to borrow.

You’ll need the sum of the purchase price and a provision for ‘working capital’. Depending on the business model of the particular franchise, working capital, which, simply put, means the money needed for day-to-day cash-flow, can amount to up to 20% of the purchase price.

All the main high-street banks have franchising departments and can lend up to 70% of the franchise purchase price. However, it is advisable to avoid over-borrowing and a figure nearer 50% will ensure you are not financially overstretched.

Fourthly, agree with your family how much you need to earn each month and year to fund your lifestyle. This isn’t the amount of revenue the business will bring in, but how much salary you need to take home to fund a decent lifestyle for you and your family. Be realistic at the outset.

Lastly, deduct the total cost of buying and running the business – spread over the term of your loan (say a year to five years) – from the likely income of the business over the same timeframe. The likely income is the profit, which you’ll find on the financial statements of the previous franchisee, if there is one.

This calculation will give a clear idea of the net amount of money you can expect to take home each month/year.

Does it match, come close to or exceed the amount you need to maintain your current lifestyle? In fact, it should comfortably exceed the amount you need to live on to ensure your franchise generates a profit.