“How much money can I make?” is the first question many people ask when they are looking at a franchise. And that answer is complicated. (It is also often not the best first question) Really, how can anyone tell you how much money you can make in any new business?
What about you?
So much of the answer depends. And often it depends on you. Are you hard working? Are you willing to get out and sell? Are you able to persuade people? Are you willing to get out from behind your desk and connect with people? Can you follow a system? Do you question everything and oppose all the help? Are you coachable? Do you watch expenses? Are you willing to roll up your sleeves and do whatever it takes? Are you willing to hire and train people if necessary? Are you well capitalized? Sure you need to know about the business but so much (if an overwhelming number of people are successful in the system) of the success of a business is on you.
Starting a New Business
There are a lot of variables in the answer to this question. Let’s start with my first point “how can anyone tell you how much money you can make in a new business?”.
Make no mistake that your new franchise location IS a new business. Yes, you have a system and training and marketing experience behind you. But unless you are buying an existing business (which opens a whole other can of worms), you will be starting from scratch. And that means that you can make estimates about what you can make, but there is no guarantee (not that there is ever a guarantee). Knowing about yourself and what you are willing to do is an important first step, but below you’ll see more of the blueprint.
No one is going to tell how much you can make. But they will give you the information that you need to see what is possible and how you would go about getting to your goals. During the franchise exploration process (called the Discovery Process) you will be given certain pieces of information that can help you create a plan and goals. Some information you might be given:
- Franchise Disclosure Document (FDD) this document will give you valuable information about your initial and monthly costs paid to the franchisor and other entities. It may not include product costs, but will include any monthly/ongoing fees paid to the franchisor. You may also (depending on the Item 19) see averages for groups of franchisees.
- Conversations with Franchisees. This is your opportunity to understand what you will have to spend money on to run your business–labor/materials/overhead, marketing, etc. You may also ask them about gross margins (net margins can be murky based on their accounting and who and how they pay the owners/family.)
- Product Pricing Lists-if you buy product from the franchisor or suppliers, you can understand the costs that are associated and build that into your plan.
Create a Pro Forma
Now that you have all those pieces of information you can begin to create a pro forma* (a spreadsheet that helps you see what you will have to spend as both fixed and variable costs) and income estimates that you will make. My experience is that people will often under estimate their costs and over estimate possible revenue. You can work with the franchisor on this so they can help you understand what you will have to do in terms of marketing, staff, etc. to get to your estimates.
The blueprint above is the only way to understand what you may make. But remember, it is a roadmap to get you where you want to be, not a guarantee. Another thing to keep in mind, with some franchises, you may need to look at how many territories or locations you need to have to get to your goals. That will also go into your proform
*Pro Forma In a business sense, companies make financial statements prepared with the pro forma method ahead of a planned transaction such as an acquisition, merger, change in capital structure, or a new capital investment. These models forecast the expected result of the transaction, with emphasis placed on estimated net revenues, cash flows, and taxes. Pro forma statements, therefore, show the projected status of a company based on current financial statements. (From Investopedia)