As some, if not most, franchises are keen to recruit new franchisees, some of them are utilising their financial projections as tools to pitch franchisee candidates.
My main problem is this is: They are projections and based on averages.
I don’t know how about you, but to me, averages are misleading.
Consider this simple illustration:
Suppose you asked a car dealer how many cars he sells in a day. He would answer about 3 cars a day. The number he stated is actually an average. The fact is not that he sells 3 cars days in and days out, consistently. The fact is he could sell 6 cars yesterday and no car today to make the 3 car sales average.
The illustration also works for franchises:
The average profit franchisees make is $10,000 per month. If there were 3 franchisees, one could make $20,000, another one $7,500, and the last one $2,500 per month – The average: $10,000 per month.
The question: Will you make $10,000 per month?
The answer: Your could make $10,000 per month, but from the example above, you are less likely to make $10,000 as 2 out of 3 franchisees make less than $10,000 a month.
Pretty misleading, isn’t it?
Unfortunately, reading some franchise publications, some of our local franchises (and business opportunities) use the averages (although they are legally allowed to do so.)
Here is some real life examples, with franchises and business opportunities brand name kept hidden:
An example of below-average franchisee performance
Franchise A, a custom, digitally-printed, ladies bag shop.
Franchisor’s projection (estimates):
- Initial investment: $7,375
- Monthly operating cost: $1,750
- Monthly sales: $2,275
- Monthly profit: $525
A franchisee’s averages (real case):
- Initial investment: $17,900
- Monthly operating cost: $470
- Monthly sales: $630
- Monthly profit: $160
An example of above-average franchisee performance
Franchise Y, a car wash/car care business.
Franchisor’s projection (estimates):
- Initial investment: $52,625 (franchise fee: $15,775)
- Monthly operating cost: $6,700
- Monthly sales: $9,200
- Monthly profit: $2,500
A franchisee’s averages (real case):
- Initial investment: $36,850 (franchise fee: $15,775)
- Monthly operating cost: $2,425
- Monthly sales: $5,250
- Monthly profit: $2,825
You can see from the above examples that let alone the franchisees’ averages, the projection vs. averages widely varies, too.
To look closely into both examples above, we can conclude that a projection is just a projection, and a projection usually tends to exaggerate income potential. The fact is, in those publications I read, 80% case studies are those franchisees whose franchise units perform below the projections/estimates made by the franchisors.
The financial information you’ve been presented with should raise these questions: Are the franchises really that profitable? Are they based on ideal situation, not the reality? Are they being exaggerated too much?
The most important question of all: How many franchisee units make more than what the franchisors projected/estimated?
How to more accurately estimate the financial
The best way is to inquire the franchise companies with what suppose to be one of your rights as a franchisee candidate: Ask the franchisor to present you with real financial statements and analysis in the last couple of years.
Although in reality franchise companies tend to be reluctant to release such information, this is the only way to learn the fact behind a franchise opportunity, although it also comes with some limitations (franchise companies can offer you the best case – financial information from the best own units they have.)
Also, don’t forget to ask about the important question of all above: How many franchisees make more than the suggested financial projections? I think franchisors should comfortably answer this question, unless – of course- there is something to hide!
Nevertheless, be stringent, even be skeptical (not too much, though) because in the end, you are the one who invest your money in a franchise.
Ivan Widjaya
Franchise financial projections
Image by svilen001.
