Owning a successful franchise is a numbers game, but it’s crucial to have a solid grasp of the financial aspects underlying the franchise model to ensure long-term success. Whether you’re interested in an education brand, a fast-food chain or a boutique fitness studio, understanding and analysing the important financial numbers is essential if you are to reach your goals and scale your business.
Here, Frank Milner, Global President of Tutor Doctor, provides advice to prospective franchisees on how to identify, comprehend and scrutinise the key financial figures underpinning a franchise in order to achieve ongoing profitability and growth.
When you step into the world of franchising, you are making an investment in a proven business model. Unlike starting a business from scratch, you are buying into an established brand and operational system, which includes upfront and ongoing costs. By grasping the financial essentials from the outset, franchisees can then make informed decisions that align with their business goals and help them navigate through the complexities of running their business.
Let’s start by considering the key financial metrics so you can be aware of what to expect. The first cost of a franchise will include the initial fee and, more likely, some kind of continuing fee, also called a royalty fee. This will vary from franchise to franchise, but you are essentially paying to use the brand name within a certain territory, receive training and advice from the franchisor.
You will then have an ongoing fee, which is your business’s upkeep, and this will be paid to the franchisor on a regular basis. Think of this as your fuel costs – it keeps you on the road and includes royalties, brand fund contribution, and other regular payments to the franchisor. It is important that the franchisor’s investment covers the continual promotion, enhancement and development of the brand and that will only be achieved by the reliance on some sort of continuing payment from the franchisee.
As a franchisee, you will have operating costs for your business, which are the day-to-day expenses of running your franchise. This may include rent, utilities, staff wages and marketing costs, such as advertising. Keeping operating costs in check is vital to maintaining a healthy profit margin and calculating your success. It’s important, however, to recognise what margins are typical in the sector you have chosen and how various franchises compare to ensure you are realistic of your business objectives.
Prior to investing in the franchise, it is advisable to review the franchisor’s historical financial statements to understand revenue streams, expenses, and profitability trends. This will then offer valuable insights into the financial health of the franchise and whether the business model aligns with your financial goals. For those prospects who don’t have the financial know-how, seeking professional advice with an accountant who has experience in the franchise industry will be invaluable and give you the confidence boost you may need. They will not only be able to guide you as you progress and flag up any potential issues or opportunities, but they can also help direct you through any difficult financial data and create realistic profitability projections.
Having an understanding of your cash flow, and consistently monitoring your financial statements, will enable your franchise to thrive and allow you to reinvest and grow. With financial knowledge, franchisees can then better anticipate and manage risks, and by having clear financial insight, it will support the strategic planning and ongoing profitability and growth of your business. At Tutor Doctor, our coaches work closely to support the franchisees who are less skilled with financial management, and this has proved a great success. Remember that being in full control of your finances is the foundation of any future business success, and by equipping yourself with the right tools and understanding in place, you will feel confident to manage your franchise’s financials.
Financial analysis is an ongoing process that requires diligence and adaptability, while enabling you to track progress towards your goals. By thoroughly understanding and analysing the key financial figures supporting your franchise, you’ll be better prepared to achieve sustained profitability and growth and turn your investment into a thriving and profitable business venture.
