Pepin Valley Consulting The Franchising Specialist
Show me the money
By Bob Hebert
Bottom line, this is where the conversation goes when I talk to people about franchising. They want to know how much they can make and they want to know now.
The answer to this question is of course, very important and unfortunately utterly impossible to answer at the beginning of the process. First, a distinction must be made between how much can someone make and how much will someone make. How much someone will make depends entirely on their specific circumstances; exact location, their costs, individual efforts and everything else that only time will tell. The good news is, how much someone can make (a reasonable estimate based on the history of former and current owners) can be reached fairly early in the process.
So why isn’t how much someone can make the first thing discussed? Because it is not the most important aspect. To back up a step, any franchise can and should make money. The first step is to determine if you are interested in the franchise. Is their concept something you can buy into? Can you see yourself doing this, being involved in this industry, this franchise, for the next ten to fifteen years? Franchises get 100’s to tens of thousands of inquiries a year. They need to be able to separate the serious from the curious. They do this by using brokers and exchanging some basic information with the prospective buyer. If after the buyer has learned more about the franchise and the franchise has learned more about the individual they are still mutually interested the process continues. This is not a long process; this is usually covered in a company information form and a phone call. But at least by now the prospective buyer can possibly “see themselves” as an owner and the Franchisor can possibly “see” the candidate as a future owner. There is still a lot of ground to be covered and most will not end in a deal but at least there is some common ground.
Now to answer the question. The information that will help you determine what you can make is in the Franchising Disclosure Document (FDD). This is a mandatory document that must be given to each prospective buyer from the franchisor (for more details see the article Franchising Disclosure Document). It contains detailed information on the franchise including estimated initial costs, an outline of all the fees you will pay, and a list of present franchise owners.
From this document you will have a reasonable starting point as to the amount and type of expenses you should expect at the start of your franchise. Some FDD’s will contain a financial performance representative (FPR), many will not. At best I find FPR’s usually contain an incomplete financial picture, giving you some information you need but not all the information you need. The real jewel in the FDD is the current owners list. From this you and your accountant can ask current owners questions about their operation and plug these numbers into your own business plan. This will help you gain a reasonable expectation as to if the circumstances surrounding your location can produce the kind of unit sales to get the profits you need to succeed.
Of course I will follow all this up with the usual “lawyerly” warning that nothing is guaranteed, (that is why they call it a business plan and not a business actual) but by talking to enough owners in similar situations you should be able to feel comfortable you can make enough to make the endeavor worth your wild; otherwise there is no point in doing it. That is the real beauty of franchising. You get the advantage of picking the brains of others who have done what you want to do, in situations similar to what yours will be and seeing their results before you invest your time and money.