How much will it cost? How much can I make? And how fast can I make it?
If you’re like most people, your top questions about franchising are probably financial. How much will a franchise cost? How much can I make? How fast can I make it? Here’s how to find those answers.
Cost of a franchise
Key information about any franchise is found in its Franchise Disclosure Document (FDD). Designed to help you make an informed decision about your purchase, the FDD contains 23 important disclosures about the franchisor, franchise, and costs of operation.
To figure out the hit to your bank account and the extent to which you’ll need financing, you’ll especially want to review Items 5, 6, and 7 of the FDD. Item 5 will tell you the initial fees that must be paid to the franchisor prior to opening. Item 6 specifies other fees that may be recurring, occasional, or one-time expenses. Item 7 gives you the initial investment amount or total upfront cost to purchase the franchise, which includes equipment, initial inventory, rent, signage, security deposit, initial training, and working capital required during the start-up period (about three months).
Earning potential
Item 19 of the FDD is your starting point for examining financial performance of the franchise. It’s optional for the franchisor to include Item 19, which discloses the earnings of existing units. Note that this data may represent only a specified group of franchisees and/or corporate-owned franchises. Always read the fine print to understand where the numbers come from, especially when comparing Item 19 claims from several brands. Many mature brands will break it down and share revenue by year in business so you can see what an average business does in Year 1, Year, 2 and so on. That way you can see how quickly a typical business ramps up.
Franchisee satisfaction and performance
Validation is an essential part of the due diligence process when buying a franchise. It’s your chance as a prospective franchisee to speak with existing franchise owners and validate the virtues of the franchise opportunity. You’ll ask them questions to get a full understanding of overall franchisee satisfaction and financial performance of the franchise. Was your investment within the range stated in Item 7 of the FDD? Was it more, or less … and why? How fast did your sales ramp up? What did your numbers look like in Year 1, Year, 2, Year 3, etc…? It’s best to contact several franchisees from the list included in the company’s FDD.
As you can see, careful due diligence will give you the answers you’re looking for. My process ensures you ask all the right questions and get all available financial data. Schedule a quick call with me to learn about your franchise options.