Tag Archives: Franchising

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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What About Franchising?

What About Franchising?For many entrepreneurs, franchising is a way to start a business with an established brand name in the marketplace. There are several pros and cons to franchising that every entrepreneur should understand before getting involved in a franchise agreement. Research a franchise opportunity completely to determine if it is the right business for you.

Marketing Support

A franchise company has spent years establishing a brand name and finding effective marketing programs. As a franchise owner, you would have the benefit of using that experience to help your business grow. The franchise company spends the money on market research, and you as a franchise owner would be able to apply that information to your marketplace and increase your revenue.

Business Methods

A franchise is based on the concept of taking a proven business method, and then applying that to multiple locations. For example, a franchise can be based on a way to cook a hamburger that has already generated significant revenue. As a franchise owner, you do not need to develop a successful business method. You only need to apply the franchise business method to your business to begin generating revenue.

Territorial Protection

In most cases, a franchise will offer a franchise owner a territory to work. That territory will be the sole domain of that franchise owner, and the franchise owner will not have to worry about the company setting up another location within his territory. A territory is normally set by geographic boundaries and varies depending on the franchise company. The franchise owner still will have competition from other companies, but he will have the support of his franchise company within his territory to help improve his chances of success.

Before signing a franchise agreement, discuss territory protection with the franchise company. We had experience with a quick oil change franchise where the territorial protection was a half-mile.

Lack of Flexibility

With a franchise agreement, the franchise owner is told how to run his business, how to lay out his location, what vendors to use, how to train his employees and in some cases what hours his location needs to be open. Because the franchise company has a set way of doing business, this means that the franchise owner doesn’t have the freedom to run his business as he pleases.

Company Image

Your franchise location image is tied to the image of the franchise company. If the company experiences a financial or product-related scandal, your franchise will experience lost revenue just as other franchises will. In some cases, your business can lose money for elements that are out of your control.

Franchise Fees

Fees required to start a franchise can be expensive. On top of location costs, labor costs and the cost of supplies, there is also the cost of the franchise license and the ongoing percentage that the franchise takes either monthly or quarterly. The hotel industry charges the highest average initial franchise fees. An average hotel franchise, including licensing and location fees, can cost as much as $6 million to start, according to Bond’s Franchise Guide. The average franchise royalty fee per month for any kind of franchise can run from 3-8 percent of total monthly sales, according to the website Franchise Prospector.

Entrepreneur magazine annually ranks America’s top franchise opportunities. Here are examples of startup costs, which include franchise fees, for some popular franchises:

Their number one franchise of the year is Hampton Hotels, with estimated startup costs of $3.7M to $13.5M.

You may find a Subway restaurant more within your price range at $116,000 to $263,000.

Want to own a travel agency? Cruise Planners-American Express Travel franchises can be started with as little as $2,095 to $22,667.

References

Request a free SCORE Counselor to discuss franchising as your business model.

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