Franchise Financial Analysis

  • Many people start their business as a Franchise, so they don’t have a financial expertise. It is very important to understand the financial nuances in the franchising business. If neglected, the cost to business and a first-time business owner can be very high. These financial points can be very useful before entering a franchise business. The analysis will enable you to understand the worth of business opportunity.
    • INVESTMENT: What is the total investment for franchise business opportunity and how much can you risk losing? Because if franchise didn’t work you may lose your entire savings. What portion of the investment can be financed?  How long will it take to breakeven?

    After answering these questions you can figure out your return on investment and check if you are getting a better return through any other investment. Are the risks equal?  Finally, you have to check your research methodology and is it reliable? Another option could be hiring a franchise advisor.

    FEES ASSOCIATED WITH FRANCHISING

    • Franchising fees & other expenses:  For franchisor’s name and assistance, an initial Franchise Fee or other expenses can range from 10,000 to several hundred thousand dollars (can be non-refundable). A significant cost of rent, building, equipment and initial inventory. You may have to pay operating licenses and insurance cost, and a “grand opening” fee to the franchisor to promote your new outlet. You must know what does franchise fee cover and what benefits you will receive for that fee.
    • Royalty fees: Franchisor royalties can be based on a percentage of your weekly or monthly gross sales or a fixed monthly royalty without significant revenue. Royalties give you the right to use franchisor’s name. If you terminate your franchise agreement, you may owe royalties based on an agreement. Royalties are usually based on sales, not income.
    • Advertising fees: Franchisors have advertising funds that require all franchisees to contribute a percentage of sales. Apart from national advertisement, it may cover regional advertising for franchisees. Some franchisors will not take contribution; however, may require franchisees to have a budget for local advertising.
    • Leases: Location plays a vital role in the success of a franchise business and these costs are significant in operating a franchise business. So a careful real estate analysis that measures the return on real estate investment is very important.
    • Training fees: Training is an ongoing process to run a successful franchise business and would involve fees and traveling expenses. It cannot be avoided because the franchisor has to maintain brand uniformity.
    • Markups on goods, and supplies: Franchisors usually have their own goods manufacturing or outsourced to a single supplier. So franchise has to purchase goods from the franchisor. As it is an additional cost the franchise must calculate the impact on profit.

An in-depth analysis of these costs would enable you to estimate the operational cost and capital required to start your business.                                                                                           

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