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FINANCIAL EVALUATION OF FRANCHISE INVESTMENTS

franchise investment

Investing in a franchise is basically the same as buying any business. The financial aspects are covered in the SCORE Brief Buying a Business. In addition, however, an important aspect of buying a franchise is evaluating the investment consequences from the franchisee’s viewpoint; the discussion below outlines a method for such an evaluation.

1. Determine the cost of the franchise privilege:
What is the total franchise package price? $___________
Estimate the value of all tangible items furnished in the package:
Merchandise or inventory $___________
Equipment and related supplies $___________
Paid expenses to attend training, travel, motel, etc. $___________
Prepaid or stated share of local advertising cost to be paid by franchisor $___________
Literature, sales aids, stationary $___________
Other identifiable assets $___________
Deduct total value of asset items (-) $___________
Net Cost (price minus assets) (=) $___________

Whether net cost is stated in the contract or must be computed as above, it represents what you are paying for the operating expertise, public awareness of the name, training and general guidance.

2. Calculating the total investment risk vs. time to recover
 

Total franchise package price

 

 

$___________

 

Plus estimated additional expenses not covered in the package: attending training, preparation of the store or operation site, acquisition and preparation of a van or vehicle (+) $___________
Total Venture Development Cost (=) $_________ (A)
Make a realistic estimate of the average monthly operating profit for this venture without charging a salary for your time. $_________ (B)
Compute the interest earning power of sum (A) (Total Venture Development Cost) as if it were to be invested in the money market at a current percent annualized return. Divide this amount by 12 to get the monthly return (C) $___________ divided by 12

$_______ (C)

Subtract (C) from (B) to reflect the loss of earning power of your Total Development Cost. This equals your Adjusted Operating Profit (-) $________ (D)
Divide (A) by (D) to determine the number of months to recover your investment (=) $_________ (E)

If your estimated monthly operating profit (B) is reasonably accurate, answer (E) is the number of months you must operate successfully to recover (A) the Total Venture Development Cost plus its potential interest earning power.

  1. Risk versus Time

Does this investment reflect the best return for your money and time? At least you now have a measure of the value of your investment money. The final answer will have to be weighed against what other gainful employment might be available and how determined you are to “own your own business.”

There are no refunds on these investments. Seek help before signing. Review your findings and plans with professional advisors, and a legal opinion on contracts is always advisable.

Note: For general information on selecting and operating a franchise, refer to the SCORE Brief entitled “Franchising.”

Need a second set of eyes to look at the financial evaluation? Request your FREE SCORE Mentor by clicking here.

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