Evaluating & Buying a Franchise

Assessing Franchise Profitability

What Are the Costs of Franchising?

There are effective means of investigating a franchise's profitability potential

While it comes as a surprise to many, finding out how much a franchisee can earn is much more difficult than it seems. Indeed, simply calling in for a quote is virtually impossible today, given that a large portion of the franchise companies are extremely reluctant to disclose figures on a potential franchisee's earnings and possible rates of return. The reason for this involves the complex history of the franchise sector in the United States, the wide variety of industries available to be franchised and the differences in regional features across the United States - and in other countries as well - which affect costs and levels of business income. Yet whatever the specific causes, many find that the difficulty in finding out how profitable one's franchise will be is an obstacle well worth getting round.

In the past, when franchising was relatively new, companies everywhere would make all sorts of outrageous claims about their offers in the hopes of luring in as many potential franchisees as possible. This made the process more exciting, but also led many to be deceived by the false promises that ended up not coming through. One of the claims often made by franchisors pertained to the earnings of potential franchisees. Indeed, it seemed that whenever someone would express the slightest interest in franchising, recruiters would quote incredible potential earnings and high rates of return for one's initial investment.

Unfortunately, many of these quotes, however, were false, miscalculated or inflated for the purposes of franchisee recruitment. It wasn't until the government stepped in and applied strict regulation to the industry that these unfit procedures ended. Now, while companies are not disallowed from displaying potential franchisee earnings, they are required to itemize them on a Uniform Franchise Offering Circular (UFOC). Due to the time-consuming nature of gathering these figures - as well as the sometimes unattractive sums that come out - many companies chose not to disclose projected earnings. This in turn has given entrepreneurs a whole new dilemma, entirely opposite to the one they faced before. When shopping around for a good franchise opportunity, one simple question - how much profit can a franchisee expect? - is often the hardest to find an answer to.

Yet fortunately for the investor who has the savvy and patience that it takes, there are effective means of investigating a franchise's profitability potential. Use the UFOC - even if it doesn't include the earnings - to find the list of all previous and existing franchisees. Poll them to find out how their businesses are doing. By asking the right questions, one can come up with a pretty accurate idea of the rate of return by measuring the investment and costs against the incoming cash flow. Of course, it is necessary to take a large sample across a variety of stores in order to find out how and why particular stores and locations fare against the others. Investors may be surprised to find out that high rent areas yield lower returns, even when there is more business coming in.

Another way to maximize one's potential profitability is by figuring out the benefits of joining an industry that has a low cost of start up and maintenance. Markets that can be run out of someone's home and require minimal overhead, or industries that do not have to continually purchase food may have a tendency to yield higher rates of return. Research it: the world of franchising encompasses close to one hundred different industries ranging from cleaning services to financial consulting and from hair salons to burger stands. While investing in an industry that one truly has enthusiasm for, it is important to make sure that one's level of profitability will be worth it.

It is important to note that many franchisors will tell potential recruits that they are prohibited from disclosing earnings data, which is not the case. Whether the franchisor is glossing over something or just unwilling to spend the time it takes to account for the figures, getting around the obstacle put in place by government regulations and a company's reluctance to disclose these figures is worth the time and the effort that it takes. By investigating the company's performance as well as that of the franchisees in different regions - and even countries - an investor will be much more informed before entering into a business contract.