11 Financial Questions to Answer Before Buying a Franchise
There are 11 key financial questions you should answer before investing in a franchise according to Eric Stites, CEO of Franchise Business Review:
- What are the total estimated costs to open the business?
- How will I finance these initial costs?
- How and when will I pay back any loans?
- How does the business generate revenue? What are the key business activities that drive sales/revenue?
- Once open, how long will it take to start generating positive cash flow?
- What are the typical expenses and on-going fees of the business?
- What’s my Plan B if things take longer than expected and I need more money?
- Assuming all goes well, what will the business be worth in three, five and ten years?
- What additional capital investment will the business require over time?
- Are my financial expectations for the business consistent with the experiences of most franchisees?
- At the end of the day, will the business yield a decent return on your total investment that is comparable to other investment opportunities?
The franchise's Franchise Disclosure Document (FDD) will help shed light on some of these questions. Items 5, 6, and 7 of the FDD covers initial fees, other fees (i.e. royalties, advertising, etc.), and the total estimated initial investment. Item 19 of the FDD, also called Financial Performance Representations (FPR), will provide information related to the actual financial performance of the franchise at the business unit level. It is important to note that not all franchise companies provide financial performance information in their Item 19, and those that do, typically only disclose gross sales/revenue, not profitability. To determine profitability, the cost of labor, rent, supplies, insurance, royalties, ad fees and all other business expenses must be deducted from the sales figure.
Franchise Business Review's Franchise Buyer’s Toolkit is a great tool when it comes to determining what your financial picture would be as a franchise owner. It includes the three-hour How Much Money Can You Make? online course that features a downloadable Excel worksheet to help you make realistic, personalized financial projections as well as an in-depth breakdown of a FDD, presented as on-demand video segments.
To increase your chances of investing in a franchise that tends to meet the financial expectations of its franchisees, look at the 200 brands listed in Franchise Business Review's Top Franchises Guide at www.FBR50.com. They significantly outperformed their competitors in terms of meeting the financial expectations of their franchisees. On average, the income of their franchisees was 15-20% higher than other brands that participated in Franchise Business Review's annual franchisee satisfaction research. In addition, their franchisees earned $250,000 or more 37% more frequently than those who owned other brands.