All potential franchisees want to know how much money they can make as a franchisee. The reality is that one of the hardest pieces of information to get from a franchisor is how much money a franchisee could make. Frustrating? Yes, but in most cases the franchisor is not being purposely difficult.
Franchisors must abide by the Franchising Code of Conduct which has stringent regulations as to how they can provide information, such as earnings claims, to prospective franchisees.
One of the reasons why this is enforced is that there is no possible way to predict how well any one franchise can do over another, regardless of the franchise or franchisees successes. Potential franchisees are generally positive and may take these facts to heart, pursue the opportunity, then when things don't go according to plan start legal action.
Secondly, if any earnings claim was to be given by a franchisor in the form of a projected profit and loss (P&L), many new business people would have trouble in understanding anything to do with loss – I know that I did when I first started.
By restricting forecast, earnings claims or projected P&L statements, franchisors are less likely to lose a franchisee candidate in the early stages of the franchising process.
But there are ways around this. Potential franchisees can get a list from the franchisor of all existing franchisees and make contact with them directly. You can ask them what their business key performance indicators (KPIs) are. They may even show you some income statements.
If getting the figures doesn't seem possible, you will have to take another approach to determine if the franchise opportunity will meet your commercial expectations. Here are 10 questions to ask any franchisee.
- How long have you been in your franchise system?
- How long did it take you to get comfortable with your franchise business?
- Does your business rely on you working in it regularly or does your business make a profit without your day-to-day involvement?
- Has your business been growing year by year?
- How long before your business broke even?
- Are you getting the support you were promised by the franchisor?
- Do you see yourself in this business over the next five to 10 years? If not, why?
- Is your annual salary after all these years where you'd expected it to be?
- When was your last holiday and how long were you able to stay away from your business?
- Knowing what you know today would you do it all again?
Once you have a better understanding of your earning potential, your next question will be whether the projected earnings represent a good return on your investment.
Remember that when you invest in a franchise, you are investing both your time, talent and your money. Therefore, you should reasonably expect a greater return than you would for a passive investment of money only.
If a good annual return for a passive investment is 10 per cent to 15 per cent, you will want to see a greater return in a franchise opportunity. A good franchise can deliver an annual operating profit (EBIT) of 15 to 20 per cent of net sales.
Consider too that a higher franchise investment does not necessarily guarantee a higher rate of return. There are plenty of low to mid-range investment franchises that provide great return on investments.
So to answer the question as to how much money you will make as a franchisee depends on many factors from the structure of the franchise, to how long your franchise has been operational, to how well you understand and embrace the system, to your enthusiasm for the business and how it will help you realise your dream.
By Tony Melhem - Director and Chairman of the Franchise Council of Australia (FCA) National Franchisee Forum and co-founder and Executive Director of Coco Cubano.
3-Oct-2008