So you’ve selected a franchise and have your initial investment capital saved and now you want to know: How much money will I make?

To answer the question you’ll need to weigh your costs against expected potential revenues.

The beauty of a franchise is you actually have a good shot at figuring all these numbers out. Between the financial disclosure document (FDD) and information available from existing franchisees, you can get a good feel for expenses, as well as potential revenues, so long as you factor in differences related to location, local market and, not to be forgotten, the range of talents and experience individual franchisees bring to their businesses.

Why is it so important to do this math upfront? In a phrase, operating capital.

Lots of folks eager to become entrepreneurs for all the usual reasons —to control your own schedule, achieve work-life balance, be your own boss, and make more money —may neglect to factor in all the capital requirements.

At the beginning of a new business comes the transitional stage. This means you need money to run your business until you learn your way around a new market, new procedures and customer care. During this transition, you won’t generate enough revenue to cover expenses. So it’s essential you have enough capital to keep the circuits humming.

Your first task is to get a realistic sense of how much capital you need to get started. Fortunately, the FDD will provide this view of your costs. Some companies will even provide an idea of potential earnings. A franchise coach can help guide you through the process, but it’s never too early to start your research.

Three Keys to Understanding Your Potential Earnings

Know your Timetable

Most businesses take three to 12 months to start earning profits. The slowest to become profitable are franchises with a lot of costs or ones that take longer to build a customer base. And if the margins are thinner, you need to generate more volume. For example, a document shredding franchise, which requires expensive equipment, may take as long as 18 months to run in the black but can eventually become quite lucrative. Retail franchises can be among the quickest to turn a profit because a good location will quickly draw customers.

Accurately Estimate Your Fixed Costs

The franchise disclosure document provides a list of all your costs —everything you need to open —which are far more extensive than just the initial franchise fee. Examples of the types of fees you’ll find under Items 5 and 6 in the FDD are: IT and system setup and initial marketing. Then comes ongoing fees, such as local marketing additional training, ongoing IT or software costs, costs for audits, insurance, and on and on. In short, all of the costs you would expect to encounter.

In your calculations, you should also factor in the cost of consulting an attorney and accountant, which we strongly recommend.

Estimate Potential Income

Flip now to Item 19 of the FDD to read if the franchisor has made any earnings claims. Only about one-third of franchisors make earnings claims, and how franchise companies address this issue varies.

To fill out the picture, your most important information can be found in Item 20, where you’ll find a list of franchisees. You want to call as many franchisees as possible, preferably those operating in locations similar to yours, to verify all the information in the FDD and get an idea on profits. Word to the wise, avoid the question: How much money do you earn? Instead, try a softer approach, such as: “How long until I can expect to make $100,000.”Then try out different income amounts.

All three steps are essential to your preparation. Doing the due diligence required to choose the right franchise upfront will help you experience the pleasure of being your own boss for years to come.

This guest post is by Dan Citrenbaum, a Franchise Coach and Entrepreneurial Consultant who helps people achieve their dreams as small business owners.  He offers free evaluations to find out what option might be the best for you.  Find Dan at www.EntrepreneurOption.com.

Thinking about buying a new business or franchise? Then Caveat Emptor! The best way to protect yourself from stumbling into a bad deal is to carefully research your new business niche and consult a knowledgeable franchise attorney.  Buyer beware, often considered a consumer warning, applies just as strongly to those thinking of buying a business. In the world of franchising, federal law has established disclosure rules to help people make wise choices. Still, it pays to consult an attorney that specializes in franchising. Of course, any franchise coach or attorney will advise prospective franchisees first to read the franchise disclosure document (FDD), which the law requires be written in standard English, so it can easily be understood by the non-lawyer. You still need a lawyer who specializes in franchises to review the franchise agreement or contract to make sure your interests are protected. Since experienced franchise lawyers know firsthand where franchisees get into legal difficulty most often, they can help you avoid the pitfalls that may exist in some franchise agreements. Most of the items in the FDD are incorporated in the franchise agreement, but an attorney can help you review the first four items, which provide background on the business and its senior executives, most particularly whether they’ve been involved in previous litigation or bankruptcy. And while there are costs involved, you can find an attorney who will provide these services for a flat fee. You should consider it part of your cost of getting into your own business. “I get phone calls daily from people who did not consult an attorney upfront,” said Nancy Lanard, a Philadelphia attorney who specializes in franchise law and works with clients across the country. “It’s much harder at that point.”

Legal Checklist For Franchise Buyers

Before buying a franchise, be sure to review this checklist:

1. Review Franchise Agreement

Five or 10 years ago, most franchise agreements were completely non-negotiable, Lanard said, but now she negotiates non-material changes to most franchise agreements to protect the interests of the franchisee. Franchise companies are reluctant to negotiate any material changes for an individual franchisee because it would require them to revise their franchise disclosure document, an expensive proposition, she added. In her review of the contract, Lanard looks for issues that might create undue financial burdens on the franchisee, including how notice on default is handled and remedies applied.

2. Check Trademark Registration

Since the trademark is “the cornerstone of what they’re buying,” Lanard’s firm checks the trademark registration to make sure another firm isn’t operating under the same trademark in the designated territory — not an unknown occurrence.

3. Set Up A Legal Entity

Lanard strongly advises franchisees to set up a legal entity before signing any agreement with a franchise company to protect themselves from third party claims. Each location should be a separate entity, she added. Her firm charges a separate flat fee for this service.

4. Negotiate A Lease

“A lease can make or break a franchise,” Lanard said. Good franchisors should offer help finding a good location. They might have demographic studies and a great relationship with local brokers. They also can evaluate the lease from a business perspective, help negotiate good business terms, favorable rent, build-out costs, renewal terms, and so on. “Leases are highly negotiable,” Lanard said. A lawyer can protect the franchisee from onerous costs that landlords may try to impose, and a good lease can save a lot of money over the long term. A separate flat fee is charged for this service.

5. Protect Territory

Disputes over territory are “probably the No. 1 litigated area of franchising,” Lanard said. A good franchise attorney will make sure that the language in the agreement regarding territory affords the franchisee an actual separate, exclusive territory. A cautionary tale is a franchise that set territory based on zip code, which allowed franchisees to open across the street from one another — not a great way to stay in business.

6. Generally Good Advice

Likely topping this list will be for prospective franchisees to carefully study the fees and other costs — items five to seven in the FDD — required to set up a franchise. Take the most conservative approach since many businesses fail as a result of having insufficient capital to sustain the business until it can operate in the black. Good research cannot be over emphasized. Lanard tells a story of a woman who phoned, excited about purchasing the franchise of her dreams in the automotive sector, a franchise she had aspired to operating since she was a little girl. While she wanted Lanard to review the franchise documents for her, Lanard suggested she interview franchisees to see if they were satisfied with the franchisor’s support and training. When the woman called back, she reported that all the franchisees she spoke to were unhappy and wished they had never bought into the franchise company at all. Better to face this type of disappointment than the losses that can accrue as a result of signing a bad contract and trying to to fix it later. Ready to make your dream of becoming an entrepreneur come true?

Get your free evaluation today!

Contact Dan Citrenbaum to help you create the career you’ve always wanted. Dan brings years of experience helping people select and buy a franchise or existing business. You can reach Dan at dcitrenbaum@gmail.com or at (484)278-4589.

The attraction of a good franchise is its proven system for making money. You plunk down your money, and the franchisor shares the secrets of the trade: follow these procedures and you, too, can have a successful business and earn a good living.

The tricky part is finding a franchise whose system is truly proven. This is why buying into a new franchise can be risky since they may still be working the kinks out of the system. After all, the franchise company learns more about the business model from the process of expansion. By the time, they’ve got a dozen or more franchises that have been operating successfully for at least a few years, the franchise has a proven track record. But not before then. And because we would never recommend buying a franchise where you didn’t have the opportunity to interview plenty of existing franchisees, this process tends to eliminate those systems that haven’t yet passed the test of time.

3 Simple Questions To Help You Separate The Winners From The Losers

How long has the franchisor been in business?

There are actually two parts of this question. First, when did the franchisor first start the business? They may have operated for years as a single unit operation. Or they may have originally started off with the idea of franchising. How long have they been franchising? What is their franchisee success rate?

How many outlets are there?

If the operation is mainly centered in the region around their headquarters, and you’re in a different part of the country, you may not want to jump into this without a lot more investigation. Learn about their process of expansion. If most of the expansion has occurred in the past year, their system may not be fully tested.

Are there regional differences in the system?

A good franchise is always experimenting. They may find some products or services are more popular in some places than others. For example, McDonald’s sells the McRib sandwich more often in the South than up North. Do you see evidence of creative flexibility? Once you have a solid assessment of how well the franchisor’s system actually works, you can move forward with your next set of questions. First and foremost: Can you follow this system? Assess yourself honestly. Even though it works for others there may be a multitude of reasons why it may not work for you. If this is the case, walk the other way. If, on the other hand, you like the system and it is a proven money-maker, you also need to know if you think you can you work well with the franchisor’s support team. Whatever you do, as you go through your due diligence, don’t let wishful thinking and romantic visions of a particular business bias your thinking. In other words, don’t fall in love with a franchise before you learn everything there is to know about it.

Ready to make your dream of becoming an entrepreneur come true? Get your free evaluation today! Contact Dan Citrenbaum to help you create the career you’ve always wanted. As a business coach, Dan brings years of experience helping people select and buy a franchise or existing business. You can reach Dan at dcitrenbaum@gmail.com or at (484) 278-4589.