Is This Franchise Profitable?
Making a major financial decision of any sort requires thorough investigation of the costs and benefits. Buying a franchise is one such major decision that you might be trying to think through if you want to start your own business. You might know that a franchise, like any new business, may take a while to become profitable or even break even. However, if you are thinking seriously about buying a franchise, you need to know what kind of profitability you can expect from it in the future, even if it is not going to be profitable in the short-term. Here are some factors you can estimate to try to figure out whether or not a franchise opportunity will be profitable:
The most obvious cost to you is the price you will have to pay to the franchisor. This includes an initial fee, which can vary widely in cost. At this point you might want to rule out some franchises immediately if the investment is simply too high for you, even though you haven’t figured out their profitability.
There are other costs to be factored into the initial investment – namely, those which come with starting up any new business. In many ways, a franchise has similar opening costs to any small business – from paying to lease space and building construction to buying supplies and hiring employees. Make certain to calculate every cost, no matter how minute, because even things like the pencils on your desk can add up tremendously. The franchisor might provide some level of support and training for you which can help you set up your business, but some do not. Find out whether or not the franchise you are considering buying includes these extras.
Another big cost you might not consider at first is repayment of loans. If you are making this large investment in a franchise with your own cash, you don’t have to worry about this. But if you have borrowed money from a bank, you will have to repay it periodically, and you will also have to pay a great deal of interest. Figure out how much money you will need to borrow to buy your franchise, because borrowing money can be very costly, depending on how high your interest rates are.
It’s not all negative – now you have to calculate how much income you can expect to make at your new franchise. Examine the profits of existing franchises the company has. Try to select branches which are most similar to the one you plan to open in terms of size and location, because profitability can certainly vary across branches. Make sure to take into account how well you think you can run the business given your experience level.
Once you have estimated your likely level of income from your new franchise, subtract all of those costs, like the franchise fee, the loan interest, and the start-up costs of your business, and figure out when you will break even! Figure out how much profitability your franchise will have after the break-even point. If you are satisfied with the conclusions of your estimates, it might be a good franchise for you. Keep in mind that there is no way to predict exactly how profitable this franchise opportunity will be.
Filed under: Buying a franchise, Franchise Advice, Franchise Articles
