With the Chartered Professional Accountants of Canada...
Before investing your savings and energy into a new franchise business venture you want the assurance that the investment is going to provide you a return on your investment and provide you with sufficient income to support your family and current lifestyle.
When asked the question you often are not provided with an answer. In fact, roughly 50% of the franchisors do not provide earning claims.
Why? Unfortunately, results vary due to a numerous factors that are outside of the franchisors control.
The Variable when Owning a Franchise Business
There are a lot of variables in operating a business. Competition, economy, labor market, traffic patterns and possibly the biggest influencing factor is the operator himself. Through your implementation of the franchise business operating system and your commitment to the business you can dramatically influence of the profitability of the franchise business opportunity. There are numerous examples of where someone has taken over an existing franchise location and with the product and same location they have dramatically changed the profitability when owning a franchise business.
The majority of franchisors in North America are reluctant to provide any kind of an earnings claim. In the past providing income projections has often resulted in lawsuits when new franchisees have failed to achieve the incomes that they were led to believe would be forthcoming.
If earning claims are provided, US franchise laws require that such earning statements be fully explained and substantiated in the Uniform Franchise Offering Circular.
In Canada there are disclosure laws in certain provinces that have similar earning claim requirements. The balance of Canada is buyer beware. If the projections are provided, how do you know that they are accurate and applicable to the market and location you are specifically looking at? How can you make a fully informed business decision and protect yourself?
To do this it is important that you do your research. If the franchise business does provide numbers to you, do not rely fully on the statements and projections that are provided. Projections are simply estimates of what the franchise business might make. They are often based on the franchisor’s experience. But inevitably they are accompanied with long statements such as, “The actual gross sales achieved by any given franchisee will differ from the gross sales scenarios shown on the Proforma Financial Statements. The Franchisor makes no representations that any given franchisee will or should expect to achieve any of the gross sales scenarios shown on the Proforma Financial Statements. “ These projections are designed to entice interest but may not necessarily reflect what will actually happen. The projections provided may reflect averages or might instead reflect the best operating store. It may reflect a corporate store and not a franchise. When receiving franchise business projections always ask where the numbers come from and what substantiates these numbers. What do the numbers really represent? Seek clarity and get the clarity in writing.
How does one protect oneself? The key is to validate the numbers. Talk to an accountant. Business consultants can also assist. The best source of validation is from the existing franchisees themselves. Call as many franchisees as you can. Ask them questions such as;
Use the information you compile to prepare three cash flow projections - a best case scenario, worst case scenario and most likely case. Plan for the best but be prepared for the worse case.
Some other financial resources are available to you. Performance Plus is an on-line performance benchmarking tool provided by the government of Canada. It provides detailed financial and employment data on more than 600 business sectors across Canada. It can provide you with average incomes of similar businesses across Canada.
Another resource available is the book How Much Can I Make? by Robert Bond, Source Books Publications. You can find the book on Amazon.com The numbers are based on US locations but can provide great insight. This book provides recent actual sales, costs and/or profit data or guidelines on over 75 broad-based franchise systems. The list runs from the McDonald's and Taco Bell's of the world to newer, smaller franchises with only a few operating units. Major industry categories are covered.
Being in franchise business for yourself is a lot of hard work. Start the hard work before you open a franchise by doing your due diligence to make sure that you are making a fully informed decision. Look at all the expenses carefully and validate each one where possible.
By going in fully informed, you will sleep better at night, rather than tossing and turning wondering if you have made the right decision. You will have the comfort of knowing that your efforts will directly affect your success and that your financial expectations are realistic and attainable.
If you're ready start looking at a featured franchise opportunity today!