Wondering when the profits will start rolling in? Find out before you invest in a new franchise!
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.