It’s a simple question, and an important one. It’s essential to work out what you need to make from a business, and assess for yourself whether the franchise you’re considering can meet your needs.
Many people start off unsure about how to think about the financial side of a business, especially when they don’t have a financial background. But with a structured approach it’s possible to put together a helpful financial plan.
Money isn’t the only thing that matters, but it is very important. We all need money to pay the bills.
But how much money is enough will depend on your circumstances, preferences and goals. So it’s important to think through
the financial side carefully and make a well-informed decision as to whether a franchise will work for you from a financial perspective.
Here are some proven steps to help you think through the financial aspects as you consider a franchise.
Identify your financial goals
Clear financial goals will help you assess whether a franchise will suit you. And once you own a business, your goals will be key to remaining focused and motivated.
So, what are your financial goals? Take some time to consider this carefully. Remember you’re thinking about what you want to make over the course of a few years.
And here’s an important tip! If you’re married or have a life partner, you must talk this through together. Your new business
will affect you both – even if only one of you will be involved. Work out together what’s important.
Your financial goals start with knowing what you need to pay for your personal expenses, put something aside for luxuries, holidays and unexpected expenses, and also for superannuation and investments.
Make sure you know the minimum income you need, just to get by day-today. Remember that what you consider a ‘minimum’ now may be more than you need. The satisfaction of owning a business may mean you are happy to make a little
less. Can you cut back so you can afford a business? Are you willing to?
Think about the next three to five years and write down your answers to these questions:
How much do we need to make?
How much would we like to make?
Are we prepared to live on less money while the business gets going? For how long can we live on less?
How much money can we afford to invest in a business?
It’s also important to realise your business may not produce the level of income you need at first. This should be expected as it takes time to build a business. So you need to be clear on how you will pay your personal bills until you can draw a regular
income from the business.
Gather information about sales and expenses
Now you know how much money you want to make, it’s time to assess whether the franchise you’re looking at has the potential to make it.
The only way to do this is to estimate sales revenue, expenses and profit for the years ahead. There are a few different places you will need to look to obtain this information.
The Disclosure Document should include information about set up and operating costs. Some franchise systems also include past results, such as average sales and expenses. Ask the franchisor’s recruitment staff to explain the information, so you understand what’s there.
If you’re purchasing an existing business, the starting point will be the financial statements for that business.
Sales can be trickier to estimate than expenses. Each franchise will vary on how best to do this. Hopefully there will be information in the Disclosure Document and your franchisor can provide suggestions. If not, ask your Accountant or Business
Rent can be a big expense if you’ll operate from a physical location, and it can vary considerably. Ask your franchisor for advice on what to expect.
Existing franchisees are usually an excellent source of information. Ask what results they achieved in sales, and what their costs and staff wages are – and what they were in the early years of business.
Bear in mind though that results vary across a network. Talk to a few franchisees, and try to understand what makes some more successful than others.
Prepare financial projections
Once you’ve gathered information about sales, cost of goods sold, wages, rent and expenses the next step is to prepare a budget. This is an estimate of the financial results you may achieve in the year – or years – ahead.
Your aim here is to estimate the sales and expenses for the business for the first few years. This will show you whether the
business will produce the financial returns you want. It takes a bit of effort, and while it’s just an estimate, you must do this!
Your franchisor may have a template. Alternatively, ask your Accountant, Adviser or Business Banker. It’s a good idea to do projections for a three year period, taking account of how revenue and costs may change. We recommend three variations: best case, worst case and most likely – reality will likely be somewhere between them.
You also need a cash flow forecast. In most businesses, sales and expenses vary from month to month. A cash flow will help you plan for and manage these variations. It’s a good idea to work through this stage with a Business Accountant or Independent Advisor. They can help you test the goals.
Compare projections to your goals
Now ask, “How do these financial projections compare with my goals?” and “Are these financial results achievable?”
This comes down to building evidence as you investigate the franchise. You should look for information to help assess whether your goals are achievable.
Now is also the time to consider what the impact would be if you were not to achieve your goals – and how you can reduce the
possibility that this will happen.
If you don’t think you’ll ever be happy with the returns that a franchise can offer, even if you were the best performer in a network, that franchise may not be the one for you. On the other hand, if the results look good, and you are excited about the business, you have a good sign that this may be a business for you.
There are no guarantees of success in business and your results will largely be determined through your own effort and
effectiveness in sales and management. These steps will help you know your financial goals and choose a franchise that
can help you meet them.
Peter Knight, FCPA and Kate Groom of Smart Franchise are experts in financial communication. They run workshops and
seminars, and present keynote speeches that help people discover the secrets of sustainable profit and cash flow.
Smart Franchise is a financial education and consulting firm that specialises in financial communication for franchise businesses. They help business owners, managers and their advisers understand and use financial information to improve