Manipulating Financials to Sell Franchises
Buckle up for some 5th grade math
Some franchisors are full of shit with the "financials" they use to sell franchises
In every Franchise Disclosure Document (FDD) franchisors provide financial information in “Item 19”.
Franchisors have a lot of flexibility in what information they provide:
1) Nothing. Literally nothing
2) Sales by quartile, time in the system, number of territories, etc.
3) KPIs relevant to the business. Average sale per job, average cost per lead, close rate, etc.
4) Corporate vs. Franchisee. Some only provide information the corporate locations. Others only provide franchisees
5) P&Ls. Some provide P&L's of a subset of locations that met certain criteria. 1 corporate location, all corporate locations, franchisees who volunteered to submit financials, only franchisees who've been open for 12 months, etc.
Expense Accounts 101
Every franchise business has similar expense accounts. In some businesses certain categories will be higher, others will be lower. Every business variable & fixed costs:
These are directly tied to sales. If sales go up these go up. If sales go down these go down.
Cost of Goods Sold
Credit Card Fees
These costs are consistent every month. There could be some minor increases & decreases with sales volume
Hiring & Training
Utilities (Electric, Gas, Waste, Water)
Phones & Internet
Auto Expenses (Fuel, Lease, Tolls, Insurance)
Insurance: Health, Liability, WC
Damage Claims / Customer Refunds
First up is a trash-smashing franchising
Here's their 2021 ITEM 19 that includes "Certain Expenses"
"Certain Expenses" = Lawyer wordsmith bullshit
Claiming Net Income is 45% of income. Super impressive…. right?
They are missing some major expenses
Fuel & Tolls $20k (8% of sales). These trucks are gas guzzling monsters.
Sales Person $50k - this is a B2B business. You get accounts by door-knocking & setting up smashing demos. Sending out some direct mail isn't going to move the needle.
Rent could be free, $10k or $20k to park the truck(s) in a secure area
Insurance $6k is low for a $150k+ truck, workers comp, & liability. It's easily double that to $12k
Maintenance $4k - oil changes, tires, brakes, maintenance to the equipment. Lots of miles & abuse on those trucks
We just added $80k of expenses excluding rent bringing net down to $32k, a much more realistic 12% margin.
Cookin’ the Numbers
Next up is cookie franchise who's claiming some ridiculous numbers:
$273k net profit on $702k sales for 39% net margin. Sign me up!
Across the low, average & high buckets, there are some consistencies:
72-74% gross margin - which I assume is just COGS (butter, flour, sugar, chocolate, paper products, etc.)
All of other expenses $225k to $263k
They claim $239k in expenses covers the rest of the expenses to operate the business
Royalty is 7%
Advertising is 5%
Credit Card Fees is 3%
No matter the volume, 15% of sales go directly to these variable expenses. Average unit $702k x 15% = $105k variable expenses
That leaves us $134k for the rest of the expenses
Most stores are open from 12pm to 10pm, 7 days per week
10 hour days x 7 days = 70 hours / week
You need at least two people working at a time = 140 payroll hours
Stores will need more than two people during peak hours
140 hour x $18 per hour x 52 weeks = $130k MINIMUM payroll
Some people will be paid less than $18 per hour but you also have to factor in the manager, who will be more. The blended number could be closer to $20 these days
Maybe they barter cookies for labor?
On average we've got $4k remaining. Uh oh
Other estimated fixed expenses:
Rent - 1,500 sq ft x $30 sq ft/year = $45k
Payroll Taxes 12% of wages = $16k
Insurance = $15k
Utilities = $5k
Software = $4k
Other = $10k
A more realistic P&L (with payroll pegged at 25% of sales) could look like this.
It still could be a very profitable business, but it's not 40%
What You Need to Do
1) Take everything you hear from franchisors with a grain of salt.
2) Speak to a bunch of existing franchisees to learn about actual expenses
3) Build out your own conservative pro-forma. You don't need an MBA to figure this out.
You could go through the entire franchise discovery process alone. Many people do. Or you could join a community of like-minded people going down the same journey.
I launched a franchise community a few months ago. It includes:
Intro to Franchising Course
Live Weekly Group Calls
Private Group Chat
LinkedIn: Brian Beers
Podcast: Business with Beers