Reading Franchise Financials
“A Cheat’s Guide? What’s that?” Well, it’s certainly not a guide to cheating in a franchise. It’s about helping you know some of the smart things to look at on the numbers side when you’re buying a franchise.
You’ve probably consulted a few cheat’s guides in the past. Perhaps a cheat’s guide to Christmas parties. The sort of thing that gives you tips on how to achieve a result without having to do all the hard work (such as making everything from scratch).
Understanding financial information isn’t something you can learn overnight. Just like you can’t become an expert baker overnight. But you can understand some of the things experienced advisers look for. This will make you a more informed franchise buyer and increase the likelihood you will make well considered choices about starting off in business.
Here are 10 things to look at when you’re assessing a franchise opportunity. They will definitely mark you out as someone who is thinking like a smart buyer.
1. Calculate your target sales
The key word here is ‘calculate’. Work out the costs of operating the business and from that calculate the sales that must be achieved to cover these costs. This is very different from projecting what you hope will be the sales.
2. Historical results
The first thing we do when we assist a franchise buyer is look at what information is included in the disclosure document. Despite what you might hear from franchisors, they are not prevented from including historical financial information. Information about historical sales, cost and profit is a great help when it comes to assessing what the financial future might look like.
3. Look back in time
The financial history of a business can help you assess its health and the strength of the opportunity. Look at three years profit and loss statements to identify the trends. Is there a pattern of sales increasing or decreasing? What about costs and profit? Ask why this is the case.
4. Monthly sales figures
What are the monthly sales over the last year (or two)? You will see there is some sort of pattern. This will help you work out what your sales pattern might be.
5. Wage costs
Work out the wage costs by calculating the cost of staffing the business at the level of sales you’re aiming at. This means asking the question “How many staff are needed to run the business and at what pay rates?”. This is the only realistic way to work out wages costs.
6. Debt must be repaid
Whether the finance to buy a franchise comes from your own money (savings, redundancy etc) or is borrowed from a bank, the money has to be repaid. So, before you get excited about the potential profit of a business, make sure you’ve allowed for repayment of the upfront costs within the first franchise term.
7. Your wages
The business needs to be able to pay you the market wage for the job you do in it. There are questions to be asked if your projections show that you have to work for nothing for more than a few months. It’s reasonable for it to take time for the sales to build up so this is possible. But unless the owner can take wages it’s not a viable business. Remember though, the wage is for the work you do in the business and it might be less than you are earning in your current job.
8. Profit after owner’s wages
In many franchises, we expect it to be possible to make a profit after paying wages to the owner for the job they do. This is the reward to the owner for taking the risk to get into business and for their skills in developing the business. How much is reasonable depends on the business and the skills of the owner.
9. Consider the future
In business, many costs increase each year. The rent figure which seems reasonable in the first year will increase every year. What will it be by the third or fourth year? What does that mean for sales? Minimum wages increase each year, and good staff will need financial incentives if they are to remain loyal. Other costs that can catch you out are repairs, refurbishments, or additional equipment. Again, what needs to happen to sales in order to pay these extra costs?
10. Look for evidence
The smart franchise buyer will look for evidence that their desired financial results are achievable. Evidence comes from both the past and future plans. How do your numbers compare with what others have actually achieved in the recent past? What are the franchisors plans for the future? What consumer trends help you assess whether your figures are reasonable?
Original Article appeared on 22/10/2018 in the Inside Franchise Business Publication.