There are literally hundreds of franchise opportunities available at any one time. How should you decide which one is going to be the most rewarding? The starting point of any business decision is working out what will work for you. John Di Natale, at franchise consultancy DC Strategy, recognises that choosing the most profitable franchise opportunity can be tricky. And it isn’t just about the money.

“A successful franchise business starts with you; your motivation, passion and commitment. Being clear on what type of business you want to spend your time in is important,” he says. For instance, do you want a retail store or a mobile operation? What will suit you best, a business serving consumers or a business-to-business opportunity? Does your interest lie in food, apparel, or something with a more technical or industrial flavour? What will maintain your interest and excitement levels?

When you have whittled down your choices to a shortlist, the real work begins, Di Natale says. “DC Strategy‘s research shows prospective franchisees are assessing up to five or six opportunities. They have access to more data than ever before. Franchisor brochures and websites are being supplemented with advice sites, research information and forums and blogs with current, past and other potential franchisees posting their thoughts on the various franchise networks.”

While these sources can be useful, carrying out your own due diligence is vital before making any final decision about the franchise. “Of course, getting the right answers is easier when you ask the right questions,” says Di Natale, who offers a list of points that are worth addressing to help get the decision right.

Check if you have detailed financial information on the business. You need to consider past performance over a long enough period to get a historical perspective and insight into any seasonality, he suggest

Consider whether the business looks professional and ask yourself whether you would buy from that business. Question if you understand what drives the business, what makes it tick and how you will grow it. It’s wise to ask yourself if the business is securing good locations, are current franchisees profitable and happy and do they genuinely recommend the opportunity?

“Does the business have a strong advertising and marketing program? Who is in the management and leadership team and what is their background and experience? Are you comfortable putting your trust in them to provide the guidance and support you will need?” asks Di Natale.

Is there a clear vision and plan for how the business will continue to grow? How good is the induction and training program? “Don’t be afraid to ask as many questions as it takes to satisfy yourself that you have all the information you need. A franchisor of any quality system will respect the fact you are making a well informed decision to join their network.”

Once you have pinpointed the franchise you believe will meet all the criteria highlighted, then it’s time to look more deeply into the financials.

The gold mine franchise

There’s a four step process to finding the franchise with profit power, writes business accountant Peter Knight of Knight Partners. Here he explains how it can be done.

The first step towards achieving your financial goal is to have one. Take a moment right now to decide how much you want to earn. Without this goal as a starting point, you’ll never find what you want. The next step is to look at those franchises which can produce that level of earnings. Having your financial goal in mind means you can be more selective about which to look at.

The third step is affordability. You must be able to afford the franchise you are looking at. The only way to do this is be fully aware of all the purchase costs and get a realistic idea of ongoing profit. The fourth step is to crunch some numbers. The only way to truly find the profitable franchise is to cut through the hype and look at the figures.

When it comes to the numbers, there are some important things to consider. For instance, how much profit can it make? How much will the franchise really cost? What’s your return on investment? It’s also vitally important to prepare a cash flow forecast so you get a feel for how the money moves through the business.

Crunch the numbers

How much will it really cost?

The franchisor will let you know about start-up costs, which include franchise fees, marketing and training fees, fit out and equipment costs. But you should also bear in mind the less obvious costs. These include legal fees, accounting advice and the set up costs for your operating structure. You should also consider your own living expenses prior to starting, when you will be in training and not yet earning an income.

How much profit can you make?

Profit is what’s left after paying all the expenses, so it’s important to really understand the operating costs of the business. If you’re buying an existing franchise this will be easier to find out as you can check on the records. If it’s a brand new franchise, you will have to think carefully about all the different types of expenses you will incur. Speaking to other franchisees will also help.

Sales revenue is one of the most important numbers here, so get a really good feel for what they will be. Make an estimate of what the sales will be going forward into the future, on a monthly basis. Use the template on p68 as a guide for this if you are unsure how to do it.

Expenses tend to be easier to predict than sales, because we know what the rent, wages and other costs will be. Give this plenty of thought and use actual or best estimates in your forecast. You can then see your profit potential and decide if it’s worth pursuing.

How to recognise a money making franchise

What to look for: it’s all about profitability and cashflow. Make sure the business generates strong profits and healthy cashflow. Check the financial statements for the previous three years to confirm the business has been making profits, and to understand the operating costs.

Look for sales growth, year on year. Watch out if sales have fallen as it could be a danger signal. Calculate the gross profit margin. This is gross profit divided by sales. Compare the gross profit margin to previous years. It’s a good sign to see it increasing.

Calculate the net profit margin. This is net profit divided by sales. Net profit is what’s left after all the expenses have been paid. Compare the net profit margin to previous years to see how it is tracking. Again, it is a good sign to see this increasing. You should be looking for a net profit margin in excess of 10 percent.Calculate the current ratio: this is current assets divided by current liabilities. This is a measure of liquidity and the figures are found in the balance sheet. The target ratio here is 2:1

Calculate return on investment. This is net profit divided by your initial investment in the franchise. This lets you compare your investment in this business against other investments, such as shares, term deposits or other ventures.

Calculate your payback; this is the number of years it takes for earnings to pay back the original investment. The target range is three to five years. After doing this analysis you are in a better position to really understand the franchise’s financial performance. You can also compare it against other franchise or investment opportunities.