How to Succeed in Franchising Financially

How to Succeed in Franchising Financially

By Janice Charles

All franchisees want to know the same thing: How do I make money? The trick is to manage the financial part of the business carefully, and that means before it gets started.

A pro forma profit-and-loss statement—a document that lists your projected financial expectations—is a great way to begin. Be sure to have a completed pro forma statement prior to training. The document, which gives you a month-by-month breakdown of your projected earnings and expenses, is an important part of your business plan. Knowing what to expect can help you stay on track in terms of spending, and it can signal problems early on, before they spin out of control.

How do you create a pro forma P&L? Here, we offer a few pointers.

START WITH THE FRANCHISE DISCLOSURE DOCUMENT

Obviously, your business projections must have some merit. So what do you base your numbers on? Start with the Franchise Disclosure Document (FDD). Item 19 in the FDD, “Financial Performance Representations,” provides a wealth of financial information that you can use to complete your pro forma statement. There are several pro forma templates available to get you started, but here are some general categories to keep in mind.

Gross Income: What income do you anticipate? Look at several models with different income levels.

Sales Tax: Know what your sales tax percentages are and subtract accordingly to estimate your net income.

Cost of Goods Sold: How much will the goods coming in your back door cost prior to selling them?

Gross Profit: This is the money you make after you deduct the costs associated with doing business. The general formula for gross profit is: Revenue minus cost of goods sold.

Expenses: This is the cost of line items needed to keep your business going. They may include: advertising costs, bank charges, credit card fees, payroll taxes, etc.

TALK TO FRANCHISEES

Once you’ve listed your projections in a pro forma P&L, you want to make sure they are correct. How do you know? Ask other franchisees. Call many and ask specific questions to see if your pro forma statement is an accurate representation of your potential business.

Next, review your pro forma with your franchise consultant or franchisor to make sure you’ve listed the appropriate categories and that there’s nothing you missed. Keep in mind a franchisor won’t be able to provide advice or actual numbers, because the Federal Trade Commission mandates that they don’t provide earnings claims. The franchisor is not trying to be evasive, he’s simply following the law. That’s why it’s so important to call franchisees—they can provide actual information from their businesses.

Janice Charles is a 38-year veteran in the franchising and food industry. She was raised in the McDonald’s system with her family where she learned all aspects of the business. Janice has been a franchisee and worked for multiple franchisors. For more information, contact Janice at Janice@TheFranchiseConsultingCompany.com