smallbusiness.co.uk: Helping your business think big

Smallbusines.co.uk has teamed up with Robina Every, managing director at Card Connection, which specialised in the franchised distribution of greeting cards, to provide five east steps to make a franchise work.

In order to evaluate the potential profit of a franchise, the key is to remove the guesswork from the equation as far as possible. In other words, deciding if a franchise will be profitable enough to create a viable business opportunity on an ongoing basis needs to be based on factual information.

Step 1: Evaluating the purchase price

Firstly, establish the initial cost of the purchase. As well as the price tag, include the cost of any stock, equipment, licensing, transport and IT systems. Similarly, check to see if the price includes training costs to get you up and running. Is this a one off or will further investment be needed in the future?

Step 2: Calculating likely income

Research the previous sales history of the territory. Anticipate that your future income is likely to be slightly less that the previous franchisee initially, due to the inevitable learning curve involved in starting a new venture.

If it is a virgin territory ask the franchisor for the profit and loss accounts of similar sized areas and use an independent accountant to look at the books for you. For a small fee an accountant will be able to provide invaluable advice which may ultimately save you thousands by preventing you making any wrong decisions.

Step 3: Consider financial forecasts with care

Financial forecasts - which the franchisor will provide you with - are useful but remember they are only estimates as opposed to the hard facts contained in the profit and loss accounts. Keep in mind any forecast may not be realistic or may even have been bolstered to encourage you to buy the franchise.

Step 4: Borrowing

The next step is to work out how much money you will need to borrow to buy and run the business. This will be the sum of the purchase price plus any additional costs such as equipment, stock and training.

It should also include a provision for ‘working capital’. Depending on the business model of the particular franchise, working capital required for day-to-day cash-flow can amount to up to 20 per cent of the purchase price of the franchise.

It is likely you will need to borrow at least a proportion of the cash required to buy the business. Work out how much you can fund yourself and how much you need to borrow. All the main high-street banks have franchising departments and can lend up to 70 per cent of the franchise purchase price. However, it is advisable to avoid o
very-borrowing.

Step 5: Evaluating the cost of the franchise

The financial statements that you will have received will give you an idea of the profits the franchise currently makes. From this deduct the total cost of buying and running the franchise (including loans, working capital, stock, training and equipment etc) - spread over the term of your loan (say a year to five years) - from the likely income of the business over the same timeframe.

This important calculation will give a clear idea of the net amount of money you can expect to take home each month / year. The question is: does it match with the amount you need to maintain your current lifestyle? In fact, it should comfortably exceed the amount you need to live on to ensure your potential business franchise generates a profit.

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