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Know Your Franchise Return Before Buying

When you firmly decide to quit your job and start your franchise business, then you will worry about two things. They are the investment the Returns. The former can be calculated based on different business options and the money you have to invest. But, the latter one is difficult to know how much you can earn from your franchise business. However, you can understand few basics to know how you can make from your franchise business.

Franchise Income

The franchisor will direct you to the FDD – Franchise Disclosure Document. This document will contain the details needed to be disclosed to a buyer. It will have all the information about the setup cost, training, litigation, performance, records, and other finance-related inputs. You can look at item 19 in FDD to understand better. In that section, you can see the profit details, the entire statement, in particular, or just the best-performing unit information. So that will not provide you with the whole idea to calculate your salary. Word of caution, do not get carried away by FDD as it is not designed foolproof, and you cannot rely on it to know your earning. It can help you understand the basic functioning of the business.

Steps To Find Your Income

You can consult a financial professional and take help. Alternatively, understand the steps they verify, and you can calculate yourself.

  1. First, know the royalty payment. This must be the entire amount collected by the franchisor from the existing franchisees for the previous year.
  2. Record that input and remember that the royalty rate is the percentage of gross sales that a franchise must pay to the parent company.
  3. Find out how many franchises are functioning full time. Now, divide the number by the total royalty payment which you recorded. This will give the average royalty payment.
  4. Finally, divide that figure called average payment by the rate (royalty), and you can know the average gross sales.

For Those Who Find This Explanation Confusing Just See The Numerical Example Given

Royalty Payment Total:          $100

Royalty Rate:  5%

Total Units:     10

Royalty Payment Average:     $10 ($100 / 10)

Gross Sales Average:  $100 ($10 / .05)

Additional Details To Include

Gross sales and profit are not same; you must calculate your monthly operating cost by reading the FDD correctly. Make a deduction of the royalty fees, employee salary, infrastructure, marketing, and equipment cost, etc. Also, consider the factors that can intervene in the business success and not all franchise across units will have the same success rate. Few locations may cost more for the infrastructure due to the economy. The tax slabs might vary depending on that particular country law. Few things might move faster in one area than the other, etc.

Hence, you can check the entire scenario before you start your franchise business. You can have a word with a legal person to help you in this situation. However, the final piece of suggestion would be, if you have the skill and interest in any franchise, then you can move forward, and in few months you can certainly make money to understand about your income for the future.