Evaluating & Buying a Franchise

Making Sense of the Franchisor's Financial Statements

What Are the Costs of Franchising?

Some key pointers that the prospective franchisee should be made aware of

Want to find out how much money can be made by becoming a franchisee? Thinking of asking the franchisor for this information? Think again.

While achieving a worthwhile return is one of the major concerns for entrepreneurs interested in exploring the franchise market, the franchisor is one of the last places to go looking for this information. For those who feel that this is somewhat strange, they are not alone. Indeed, it's natural to look to the franchisor company for a well informed estimate on how much return can come from an investment - this is vital information to the decision making process. However, there are certain factors which have made companies somewhat reluctant to disclose this type of information.

Indeed, finding out how much return can be expected through becoming a franchisee is a more difficult task than it seems. The reason that companies are often not forthcoming with this information is due to decades-old federal regulations that have placed strict control on how companies present this information, making many reluctant to disclose their estimates on the amount of revenue that a franchisee could likely foresee.

Why is this so? It all began after unregulated franchisors pushed the limits by making inflated claims about how much their franchisees could earn. To stop this, the government stepped in - nearly thirty years ago - and established a set of strict guidelines detailing the precise method in which companies could disclose their projections for franchisees' earnings. Due to the fact that these figures are checked up on regularly by the government, franchisors are often reluctant to spend the time and money it takes to produce an accurate report. Added to the fact that their recruiting departments would rather focus on other attractive features of the franchise to promote their sales, it is exceedingly difficult for a prospective investor to get a straight answer out of one of these franchising outfits.

So, with the companies themselves out of the picture, many investors are often do not know where to turn in order to find out this essential information. Fortunately, however, there are effective and reliable methods of research that can be employed by the savvy entrepreneur to get around this inconvenient obstacle.

One of the best methods for a prospective investor to get an accurate idea of how much money can be made is by going straight to the source - the franchisee operators that are currently running their own stores. Before making the important call, however, there are some key pointers that the prospective franchisee should be made aware of.

In order to get the right answers, the investor would be wise to think through the questions that he or she will be bringing up. Calling up a restaurant out of the blue and asking the owner how much he or she earns is a sure way to hear a sharp click followed by the dial tone. A better way of going about the investigative process is by simply presenting oneself as a curious business person and working up the crucial question little by little. By demonstrating a genuine interest in how well the franchisor-franchisee relationship is working, many will find that their interviewees are more than willing to talk about advantages they are experiencing with their business - as well as the drawbacks.

A typical series of starting-off questions should seek the operator's opinion about how well the company delivers support to its franchisees. For instance, did the franchisor's training process really make it possible to jump into the business and get things going, or was there a lot of missing information? Is there ongoing training? What about the grand opening; did the franchisor send people out to help or did a packet of materials come in the mail? How effective is the group purchasing power? Does the company make the most of its potential for achieving group rates in order to help its businesses save the most they can? Is there a good relationship between the company and the franchisee?

By working up to the big question in this way, the entrepreneur will take in useful information about whether or not the franchise is worth pursuing any longer. The next phase of inquiries should touch on sales vs. expenses, total flow of cash and how much what kind of profit comes out of the revenue. Even the most guarded business owners will likely offer enough information for the investor to estimate percentages of return.