how to assess your franchise business' profitability


You’ve been saving every penny you can get your hands on to open your own business, and now you want to be sure your franchise is a good investment.

There is always some degree of risk associated with making any investment, but you should be able to lessen those dangers as far as possible. So, before you make the leap and part with your capital, be sure you’ve done your homework.

A Checklist To Assess Your Franchise Business Profitability

With the help of this checklist, you should be able to make a well-informed investment decision.

1. Ask The Franchisor For The Financials

Be sure to get as much information as possible from the franchisor and the franchise you intend to buy. You must evaluate only the present performance, not some abstract concept of “potential profits” while making a purchase decision. Prospective franchisees get access to financial information from franchisors that explains the company’s success up to this point. Some things to think about are:

  • The price of goods
  • Expenses¬†such as rent, salaries, etc.
  • To get a sense of the company’s trajectory, it’s a good idea to request at least three years’ worth of profit and loss statements. Assess the consistency of the income and probe for any changes.

2. Understand Your Customer Spread

The customer base is one of the most critical aspects of every company’s profitability analysis. Inquire about the topmost industries that contribute to the business’s income. Consider the share of sales made by the top 10 clients.

It is crucial to have a firm grasp of the customer-risk dynamic to mitigate potential losses. If a customer contributed 20% of annual sales, for instance, losing them would be devastating. Your consumer base will be more successful in the long run the more varied it is.

3. Consider Business Seasonality

To further evaluate the company’s seasonality, you can request monthly revenue for the last year. Insight like this is invaluable when taking over a business. If, for instance, you close soon before a slow time, you may require more liquid assets to pay operating costs.

The upside is that you’d have additional time to learn about your business. Knowing what resources are available from your franchise’s parent company is essential when business is slow. Also, make sure you have all you need as a new franchise owner to settle in before the busiest time of the year.

4. Transparency In Business Is Important

Access to all the information necessary to choose is a red flag that should make you wary of purchasing any business. Open communication with your franchisor is the cornerstone of a healthy business partnership.

5. Get Input From Other Franchisees

It’s wise to consult with franchisees already in the business. Current franchisees in the network can give you invaluable insight into the franchises’ day-to-day operations since they have already gone through the process. To a large extent, they know how profitable their company is. Learning about the company’s culture and connection to the franchisor is also possible through these sources.

6. Trust Your Gut

If you have doubts about your franchise opportunity, it’s in your best interest to go further into the specifics. Put yourself in the company of trusted advisors who can steer you toward making a wise investment. Before signing any paperwork, you want to be well-informed.

Consider all of the information at your disposal and look into it carefully. Avoid making a snap judgement based on your feelings and instead arm yourself with facts for the best possible negotiating position.

7. Research The Local Market

Investing some time in learning about your immediate surroundings might provide a wealth of information about the prospects for your company. Observing the closure of local enterprises may be an indicator of the local economy’s health or the success of future company ventures. You should rethink the franchise concept you’re launching. Attend professional gatherings and see what happens. Get to know the residents and business owners in the neighbourhood.

If you want additional franchising information, contact The Franchise Institute. You can speak with our team by calling 1300 855 435 or filling out this contact form, and one of our experts will contact you as soon as possible to answer all your questions.

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