A guide to estimating your franchise earnings

Five simple steps to understand franchise profitability

Hey, future franchise owners! The big question: How much money will your franchise really make? It’s what everyone wants to know, right? But here’s the truth: you won’t get a detailed play-by-play from the franchisor. They aren’t going to hand over a perfect P&L for every franchisee. So, what does that mean? Well, it means the ball is in your court to figure it out!

Sounds intimidating? It doesn’t have to be. You don’t need a CPA or an MBA to do this! I’m going to show you five simple steps to build a financial model for your franchise that’ll give you a clear picture of what you’re working with.

Step 1: Estimate your revenue

Start with Item 19 of the Franchise Disclosure Document. This is where you get a sneak peek into the financial performance of existing locations. Look for numbers like average revenues or gross sales and use that to estimate your first year’s revenue. Remember, you’ll have a ramp-up period, so your first-year numbers will probably be lower as you build toward those averages.

So, after step 1 you should have something that looks like this ...

Step 2: Define your expenses categories

Here’s where the real work begins. List out every possible expense: Payroll, marketing, insurance, royalties, loan interest – everything! Not sure what to include? We’ve got you covered with some amazing resources to get started:

• SBA: https://www.sba.gov/business-guide/plan-your-business/calculate-your-startup-costs
• BPlans: https://www.bplans.com/start-a-business/finances/
• Entrepreneur: https://www.entrepreneur.com/article/220532
• Franchise Direct: https://www.franchisedirect.com/

So, after step 2 you should have something that looks like this …

Step 3: Validate your numbers

Talk to existing franchisees! Your franchisor will give you access to existing franchisees, so call them! Ask them about their expenses in those categories you wrote down. What did they spend in year one, write it down? Are you missing anything? This is where the magic happens – you’re getting real-world data from people living it!  Use the numbers they give you to complete your own expense categories. 

So, after step 3 you should have something that looks like this …

Step 4: Add debt service

We’re not just talking about EBITDA. You want to know what cash flow is going to look like, including debt principal payments to get an idea of your cash flow and working capital needs when you open. This will help you figure out when you might break even and start turning a profit.

So, after step 4 you should have something that looks like this …

Step 5: Three-year forecast

If you’re borrowing money this is what the banks want to see. Take your year one estimates, then project out your revenue and expense growth over the next three years. As you get more experienced, your margins should improve, right? That's the goal!

So, after step 5 you should have something that looks like this …

In conclusion

Understanding franchise profitability doesn’t have to be overwhelming. By following these five simple steps, you’ll gain a clearer perspective on the financial potential of your franchise investment. Remember, taking the time to build a strong financial model now sets the foundation for long-term success.