Businessmen handshake

How to Assess the Profitability of a Franchise

When deciding whether to invest in one of those quick service restaurant (QSR) franchise opportunities, the first question that most franchisees ask is this: “How much can I really make?” The problem is that there’s no one-size-fits-all answer to this question because of the many different factors that come into play when estimating potential profits and revenues of any franchise, and ultimately how much you can actually take home with you.

Furthermore, in the franchise game, there are significant differences regarding profitability between various industries and concepts, as well as many factors such as operating experience, market, location and the current economy.

The Difference Between Personal and Business Income

Among the biggest mistakes that prospective or new franchise owners make is that they equate personal income with business income or profits, leading them to invest in a franchise with impractical financial expectations. Take note that the personal income of a franchisee is substantially lower than their business profits. This is mainly because of things like taxes, necessary business reinvestments and loan payments, which owners will need to cough up before they can pay themselves from their business profits.

Estimating how much you could potentially make when you invest in a franchise business could be tough. But if you have at least a basic understanding of accounting, or with help from an accountant, you can begin your financial analysis of a prospective franchise investment.

Key Questions to Answer When Conducting Financial Analysis

Business meeting

The following are crucial questions you need to answer before investing your money in a franchise opportunity:

  • How much would the total estimated costs be to buy a franchise?
  • How would you fund these initial expenses?
  • Would you need a loan, and when and how would you be paying back your business loan?
  • How exactly does the franchise generate revenue, specifically, what activities are the main driving factors?
  • What are the ongoing fees and usual expenses of the franchise?
  • Once you’ve successfully opened your business, how long would it take you to start seeing positive cash flow?
  • Do you have a Plan B in the event that it’s taking you longer than you expected to be profitable, but you need more cash?
  • Would you need extra capital reinvestments over time, and how much?
  • Let’s assume that everything goes as planned, how much would your business be worth in about two, five or 10 years?
  • Are your financial expectations in line with most franchisees’ experiences?
  • Ultimately, will your franchise generate a decent return on investment (ROI) that’s at least comparable to other business opportunities?

It’s also vital that you create a five or 10-year financial projection of the franchise you’re looking to invest in and talk with other franchisees regarding their experiences so that you can have a more practical view of your potential earnings. Doing so would help ensure that you don’t waste your time and money on an average or underperforming franchise business, and instead make sure that you get the chance to be one of the many hugely successful franchise owners helping to drive the country’s economy.