Figuring Out What You’ll Earn As A Franchisee Even When The Franchisor Doesn’t Tell You — Part II

Suddenly, Isabel wasn’t so ecstatic! (Don’t go any further until you read Part I of this story).

And how I hate to be the bearer of bad news, especially when I’m working with someone who’s paying me money. She thought she knew she could pay herself a tidy six-figure income after buying and operating a particular franchise, but she just didn’t have the right numbers.

Clever deduction, but it wasn’t reliable

So I let her down gently.

“Isabel, good work,” I said in reference to the handiwork she had performed on the franchisor’s revenue stream. Most franchise prospects don’t even think about backing out the numbers the way you did. They expect the franchisor to tell them what they can earn, and when the franchisor refuses, they’re mystified. But you took matters into your own hands and that says a lot about the kind of franchisee you’re going to be.”

Isabel’s enthusiasm abounds

“I’ll be a great franchisee,” she assured me. “I am a hard worker. If I’m in love with a product, I can sell it. I can sell this franchise, too!”

“Okay, okay, I understand,” cutting her off before she started selling me. She’s one of the most enthusiastic people I’ve worked with in a long time. “But Isabel, there are a few holes in your deduction.”

The holes in the deduction process

“I figured you’d say that,” she shot back. “My accountant wasn’t too happy about the process, either.”

“Do you understand why?”

“Yes, of course. I know I don’t have all the information I need because the franchisor won’t give it to me!”

Simple math leads to a simple number

“Exactly,” I continued, ignoring the latter part of what she said. “You divided the sum of royalties paid to the franchisor by the number of franchisees that were in the network. And that led you to determine how much money the average franchise generated and from that you figured you could pay yourself — eventually — more than $100,000 a year.”

“And I still believe that’s right,” she emphasized.

“It may be,” I said, “but you can’t count on it based on the numbers you used. First, not all of the franchisees were part of the network for all 12 months.”

What does average really mean?

“Better yet, doc” she said, reverting to her familiarity with me. “There were fewer franchisees generating that royalty revenue than the number I used. So the average revenue is actually higher!”

“You’re quick, Is!” I can be familiar, too. “But look, not all of the franchisees paid the same percentage of royalty. Most probably paid 6%, the number you used, but some may have paid as little as 4%. Others may not have paid any royalties! So you can’t get the number you’re after with the numbers you have to work with.”

You need to get as close as possible

“But I think I got pretty close!”

“You may have,” I said.

“Why won’t the franchisor just tell me that I’m pretty close? Or why won’t they just tell me what I’m going to earn and we could move on?”

“Come on. You know the answers. They’re not going to violate the law.”

Most will not make an earnings claim

“They don’t have to if they’ll file an earnings claim!”

“You’re right,” I calmed her down. “But most franchisors choose not to. It doesn’t mean it’s a bad deal. But it does mean you’ve got to work harder to get at the financial information. And you’re doing a good job of it, Isabel.”

“What do I do now, doc?”

Franchisees are likely to help

“Take your information to a franchisee,” I told her. “Show the franchisee your financial handiwork. Ask the franchisee to listen as you work through your logic and numbers.”

Franchisees will respect a prospect who has worked hard to figure out the projected financials. And, of course, franchisees are not prohibited from sharing financial information with prospects.

Talk to as many franchisees as you can

“You may want to talk to several franchisees, and that’s how you’re going to get a confirmation for your work,”I said. “If you’re off base, they’re going to tell you, and they’ll show you how. Ultimately, they’re likely to tell you how much money they earn and then you’ll know if this business makes sense for you — at least financially.”

“I’ll do it,” she said.

And with that our consulting session ended.

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Photo image by: liza31337

Categorised in: Buy a Franchise

This post was written by Dr. John Hayes