Buying a Franchise? Step 1 – Understand the Financial Aspects of the Business!

So, you’re considering purchasing a Franchise!!!  Great, now before you get to exited lets ask ourselves a question.  Do you understand the financial side of the business you are going to start?  I understand you understood what you were told by the franchisers but have you sat down and went through a budget?  If not then I am going to tell you right now without any question you are not ready to buy this franchise and you are definitely not ready to open!!

I am amazed by how many franchisees I speak with that have never been able to get a grasp on their budget, even after operating a franchise for multiple years and most do not see this as an issue of why they are struggling or in some instances failing.  If you do not understand what it is going to take to get you to an acceptable profit margin then you are going to either hit it and be extremely lucky or you are going to struggle year after year wondering why you ever bought into a franchise in the first place and wonder what on earth are you doing incorrectly.

Lets clear up a common misconception out in the franchise world today.  I do not care what franchise you are with, the franchisers and the franchisees goals and objectives are not always going to match up and in some cases are going to be opposite of each other.  Franchising is not one big happy family where everyone is working for the common good and everyone’s goals and objectives are in perfect alignment.  If you think that is the case you are in for a rude awakening sooner or later.  franchisers are not nearly concerned about your profit margin or your cash flow as you think and a lot of what you are being told has to be evaluated carefully because franchisers and franchisees objectives are sometime different!!!  The vast majority of franchisers make their money off of Royalties which are a percentage of sales.  The more sales you make the more money they make.  Now if you make more money but your profit margin goes down does it hurt the franchisers?  No, not at all as long as you are not endanger of going under.  If the franchisers encourages the franchisees to do a certain item but it lowers not only your profit margin but your cash flow, does it hurt the franchisers?  Not if the sales at least stay the same and if they go up then they will profit even more off of the royalties.

What I am saying is not to distrust or turn against the franchisers.  I am saying you have to take the responsiblity for your own financial health and educate yourself to know your side of the business inside out backwards and forwards.  I guarantee the franchisers does!!!  In franchising it is a game of give and take.  I as a franchisee cannot always have it my way and sometimes I have to give in and do whats best for the team.  But when I do that I must have the ability to know why I am doing it and instead of it being  blindly following the leader it is an educated thoughtful move.  Sometimes I have to do whats best for me because I have a lot shorter time horizon than the franchisers.  While the franchisers have the finances to wait 5 years for a plan to succeed and to start producing good income I have to be sure my business is solid now and my time horizon has to be much shorter by nature.

Budgets are not complicated items and do not have to confuse everyone like they do.  In my business I have simplified my budget down like this.  Number 1 item that affects my budget is what I charge clients.  If I under price myself I can lower my profit margin very quickly to 18 percent but if I charge what I know I can get I will be right at 40 percent.  Know what your charging and know how it affects your business.  2.  Labor – You have to have a control on your labor or this will kill your business.  Your plan has to produce the right labor percentages no matter what and there is no excuse for the percentage to run out of control.  Labor is controlled differently in different businesses and in another post I will go into some labor management systems but you have to get a handle on this today!!!  3.  Marketing – Your marketing dollars have to be a set amount and has to be distributed in a logical effective manner.  The trouble I see here is people putting on a blindfold and throwing darts at a dartboard hoping to hit a bullseye.  First you must have a specific amount of money you are going to spend on marketing and not a “when I have some money I will spend it”  attitude.  You also need to know what works and what doesn’t and limit yourself greatly to spending 95 percent on what you know works and the other 5 percent on items that may work.

After you get a handle on those 3 items then your business is nothing but execution and operations, something that should be the most natural thing for you to focus on and something that you should be spending the majority of your time on.  With the budget issues settled and a clear path to run on you can execute much more efficiently and also your operations will run at peak performance driving your sales upwards!!!


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