Taking up a franchise can be an incredible financial opportunity but if you’re not careful, you could plunge into a pitfall. Sometimes in order to attract franchisees, some franchisors may misrepresent or withhold certain information which can lead to horrifying outcomes. To help you not get blinded by all the flash being thrown your way, here are some things to look out for.
Usage Of Average Figures
Most franchisors will present financial projections that are computed based on average figures so these figures could be derived from both extreme higher and/or lower tiers of franchisee revenue, thus skewing the overall average. Another scenario is the average figures could be derived from among some of the best performing franchise units, while excluding those that are performing undesirably. Since average figures could be very misleading, be sure to ask how such numbers are derived and make the franchisor accountable for providing these projected financial situations.
Determination Of Investment
In order to portray an attractive return on investment ratio, some franchisors may choose to state investment requirements that comprise of only the bare minimum setup. Not that this is wrong, but the bare minimum setup may not necessarily mean the business unit can generate similar sales figures in the financial projections.
Here’s an example:
In the case of a restaurant franchise; check if the investment amount is sufficient to secure an operating space with ample sitting capacity, purchase enough equipment and inventory, and hire enough staff to cope with and generate the revenue figures put forward.
An often overlooked point when evaluating a franchise venture is whether working capital is included in the initial investment. If no, a basic guideline is to prepare 3-6 months of rent expense and employee salary for working capital (not limited to and varies for different businesses or people). Whatever the amount you choose to set aside as your working capital, inlcude it in the required investment outlay and see if it fits within your quantum.
Making Sense Of Sales Figures
The level of profitability may vary or be dependent on geographical location so try to understand whether the success or profitablity of the franchise business is tied to being in a certain location or country. Look at the breakdown of sales figures in the financial projection and determine if it makes sense, i.e. whether the income level of the territory you’re looking at could bear the prices to be charged and supplement the expected number of sales.
Revenue Vs Profit
A high gross revenue may not necessarily mean high profits, as it could be easily diminished by high costs. A better indication of profitabilty is to look at net profits to determine whether the franchise business could meet your own financial goals.
Identify Recurring Fees
Aside from royalties and marketing fees, some franchisors may require their franchisees to make additional recurring payments or expenditures. These financial outlays could comprise of periodic purchasing of proprietary items, required training, annual restoration of the franchise unit, among others. Take a look at your franchise agreement and review all the recurring fees and required financial outlays you wil be subjected to as a franchisee.