Estimating Profitability of a Franchise Opportunity
In the UK there are many franchising opportunities being offered for sale. For people who would like to manage their own business franchising can be an attractive option. People buying a franchise will obviously want to be sure that they are investing in a profitable business. Although buyers can never know exact figures, with work they can make accurate estimates on the likely profitability of the business. Evaluating a franchise to see if it will be profitable enough to make a viable business can be done through a number of stages.
Every franchise will require its franchisees to pay an initial fee. This fee is the starting point for the franchise agreement. The size of the fee will vary substantially from franchise to franchise. All potential buyers of a franchise first need to calculate how much they are able to invest and rule out franchises that are too expensive.
It is not just the size of the investment that should be considered here. Also to be taken into account are other expenses needed to begin the business. These costs will include the purchase of any relevant stock, equipment, property, transport and IT systems. Totalled together these costs will give the purchase price of the franchise. It is important that franchisees also look at exactly what is included in the investment i.e. is training and support provided or will this be an additional cost.
Franchisees should ask to see profit and loss accounts of existing branches of the franchise. Ideally to be of maximum use these accounts will be from a branch of a similar size and location to the branch that they are proposing to open. If taking over an existing branch of the franchise estimates will clearly to easier to make although they should be adjusted to account for the new owner’s level of expertise and experience. Franchisors will usually provide financial forecasts which again can be useful when estimating likely income.
Borrowing & Interest Payments
It is likely that anybody investing in a franchise agreement will commit to a certain amount of borrowing. When calculating profitability the repayments on this lending will need to be taken into account. People interested in entering into a franchise agreement may find that lenders are prepared to provide up to 60-70 percent of the initial investment amount. Generally the less the franchisee has to borrow the better. Franchisees should look to see how much they have to invest and then calculate how much they will need to borrow.
By deducting the size of the initial investment, running costs and loan repayments from estimated income potential franchisees can calculate how profitable the business is likely to be. With this calculation franchisees can then decide if the franchise will make a good investment.
About the Author
wok2go is the UK’s first Chinese fast food franchise opportunity. With healthy food and even healthier profits wok2go is offering a unique opportunity for anyone who would like to buy a UK franchise.
Peter Newman, Scott Borden, Michael Lee: Economics 2009