Making money is central to buying a franchise so why not plan your profit route, suggests Kate Groom. The desire to generate income and build wealth underlies every decision to join a franchise network. Profit and cash flow from your business should enable you to draw an income, payback your initial investment, and fund secondary investments or superannuation.
When you decide to sell the business the resale value will depend to a significant extent on the profit pattern that you have achieved and which can be sustained in future. When researching franchise opportunities you’ll identify systems that are a good match for your skills, personality and aspirations.
Yet no matter how supportive the franchisor, creative the marketing or saleable the product or service, if the business does not make a profit it isn’t going to be enjoyable for you.
In the long run, profit is not optional.
How much profit is enough? The answer is clearly a personal decision – and the first one the aspiring franchisee must make. Taking time to clarify and write down your personal and financial goals is an essential first step to success; after all, if you don’t where you’re heading how will you decide on the route for your journey?
Once you know your financial targets you can start to assess whether your preferred franchise choice will help you reach your goals.
A good starting point is to consider questions like:
* What is the profit profile of the network? In other words, how profitable are the franchisees?
* Given my financial circumstances and the market that I am considering, what is the financial and business plan I must achieve to meet my goals?
Understanding the profit profile of the network
Here we are interested getting an understanding of the profitability of the existing franchisees and a sense of what is possible. For example:
* What is the pattern of sales and costs and how does this vary over time?
* What is the range of results for key performance indicators such as sales, gross profit, labour, rent and overheads?
* What are the long term business trends?
This information will help you determine the viability of the system and ultimately help you craft reasonable goals for your own business. These are important questions that should be asked – and answered to your satisfaction – before you make a decision to proceed with the business.
Some franchisors provide very comprehensive historical revenue and cost information as part of the disclosure process. This might include high, low and average results for sales and for key financial metrics. If this information is available you have a head start since you can clearly identify the range of performance within the network.
Even if comprehensive performance analysis is not available, the franchisor can disclose operational benchmarks such as cost of goods, which you can combine with an understanding of the start up costs and operating model to profile the business.
What if the franchisor does not provide historical performance information? In this case you’ll need ask franchisees directly; which sometimes presents a challenge since they may be reluctant to give you specific information about individual sales, costs or profit.
When gathering information from existing franchisees questions like how are you going? and How long did it take to reach break even? are of limited use as they don’t give clear and generally applicable information. Break even, for example, will vary based on the specific costs, drawings and overheads of each business.
To build a more useful picture, ask specific questions. For example, it may help to know the number, frequency and value of customer transactions, how the pattern of staff employment has changed over time, and the nature of overhead expenses.
Bear in mind also that newer franchisees may not be profitable simply because sales are low. However, if you can gain an understanding of the cost structure of the franchise you can identify whether the business could work for you subject to achieving sales targets. This point in your franchise evaluation can also be a good time to learn how your future franchisor supports the continued profitable growth of their franchisees.
Profit profile your own business
Having satisfied yourself that the economics of the franchise model make sense, the next question is whether the business can enable you to meet your financial goals. As any entrepreneur knows, there are no guarantees in business and franchising is no exception.
But even without the benefit of a crystal ball, you’ll have a better chance of achieving your goals when you create a detailed financial and business plan. Your financial investigations will need to answer the following questions:
1. Can you generate an operating profit with your specific cost and overhead structure?
2. Will the anticipated operating profit and resulting cash flow cover your living expenses, financing costs and pay back your investment in a reasonable time?
If you are considering a greenfield opportunity you will need to create your own projections based on what you’ve learned about the network. First you need some idea of how much revenue is achievable. Ideally, the franchisor will provide you with average historical information for sales in the first two or three years of business.
If sales history is not available you can construct a sales plan based on what you have discovered about the frequency and nature of customer transactions.
Next you’ll need to consider your costs. While any historical cost information from the disclosure document will be helpful, your own research will be essential since the projections should take into account local conditions especially for items like rent and staff wages which can vary substantially between locations.
The complete picture
Finally you should take into account loan interest, capital repayments and your living expenses, as well tax obligations, in order to get a complete picture of the business.
If you are purchasing a resale then it’s likely that you will be able to obtain historical results of that specific business. These should be considered in the light of other franchisees’ performance so you can determine the extent to which the results may differ under your ownership. You might also need to consider refurbishment or other upgrades which could affect profit.
Thus armed, you can make a reasonable assessment of whether the business opportunity will enable you to achieve your financial goals. Considering these projections and what you know of the marketing, operations and support processes, have you got a model you can believe in?
It will be obvious by now that all this profit focus means a fair amount of number-crunching and some long range planning, including tax planning. Even if you have strong financial skills, it will pay to seek help and advice from an accountant who is familiar with franchising.
Your accountant can also be a valuable resource by providing a balance to your entrepreneurial optimism and enthusiasm. Try to find one with sound general business and coaching skills so they can critique the business from every angle and ask them to drill you on why it will succeed as you propose. This will be useful preparation for seeking financing as your banker is likely to want the same evidence of your ability to repay your loans.
Finally, while everyone hopes your business will succeed as planned, it’s important to work through scenario planning such as what would happen if sales or costs don’t behave as you expected.
Franchising provides a great opportunity to build wealth and enjoy the challenge and satisfaction that comes with making your own business decisions. No matter how much you love the thrill of the sales chase, profit is a key measure of success and the best way to achieve your profit goal is to plan for it
Kate Groom helps franchise networks create and implement peer-to-peer profit improvement programs and previously held management roles at Signwave and Kwik Kopy in Australia. She returned to Australia in May after 18 months in the US.
Contact: kate.groom@profitsoup.com www.profitsoup.com