Manipulating Financials to Sell Franchises

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:

Variable 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

• Direct Labor

• Management Labor

• Royalty

• Advertising

• Payroll Taxes

• Credit Card Fees

Fixed Costs

These costs are consistent every month. There could be some minor increases & decreases with sales volume

• Rent

• Hiring & Training

• Utilities (Electric, Gas, Waste, Water)

• Phones & Internet

• Software

• Auto Expenses (Fuel, Lease, Tolls, Insurance)

• Insurance: Health, Liability, WC

• Damage Claims / Customer Refunds

Trashy P&L

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

Payroll:

• 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

• Franchisor Webinars

• Live Weekly Group Calls

• Private Group Chat

Lets’s Connect

Twitter: @brianbeers

LinkedIn: Brian Beers

Podcast: Business with Beers 

Cheers!

Brian Beers