Every buyer I talk to wants to know one thing: is a franchise profitable, and will it be profitable for me? Fair question. The trouble is that most of the numbers you’ll see in the sales process aren’t profit at all.
Here’s how I’d figure it out.
Start With Item 19, but Read It Carefully
Item 19 of the Franchise Disclosure Document is where a franchisor can share sales or earnings data. It isn’t required to. But if it makes any earnings claim, the FTC says the claim has to be in Item 19 and have a reasonable basis. If someone tells you what you’ll make and it’s not in Item 19, take note.
When you read it, ask:
- How many units are included? If a few top locations are shown out of a large system, that’s not typical.
- Is it an average? The FTC warns that a few very successful units can inflate an average.
- Is it gross sales? Sales don’t tell you about rent, labor or royalties. A unit with big sales can still lose money.
- Is it from company-owned units? The FTC notes those can have lower costs than you will.
- Does the geography match yours?
You can also ask for the written substantiation behind the numbers. The FTC says the franchisor must provide it if you ask.
Is a Franchise Profitable After All the Fees?
Profit is what’s left after everything. That includes royalties and ad fund fees, which usually come off gross sales whether you’re making money or not. Take the sales figure and subtract:
- Cost of goods
- Labor, including a manager if you won’t be on-site
- Rent and occupancy
- Royalty, marketing and technology fees
- Insurance, software and local marketing
- Loan payments
What’s left is what you might earn. And don’t forget the time. The FTC says it can take more than a year to break even, and some franchises never do. I go deeper on startup costs in How Much Does It Really Cost to Buy a Franchise?
Talk to the People Who Actually Know
Item 20 lists current and former franchisees. The FTC suggests calling owners who’ve been open just over a year, and owners who’ve been in it about five years. Ask them:
- How long did it take to break even?
- When could you pay yourself a reasonable income?
- Would you buy another unit?
That last one tells you a lot. Owners who are making money usually want more.
Former owners matter too. Ask why they left.
Check the System, Not Just One Store
Look at Item 20’s turnover tables. Lots of closures or transfers can point to units that aren’t profitable. Then have an accountant look at Item 21, the franchisor’s audited financials. A franchisor that makes more from selling franchises than from royalties deserves a closer look.
Build Your Own Numbers
Here’s the part most buyers skip. Take what you learn from Item 19 and the franchisee calls and build a simple model for your market, with your rent and your wages. Have an accountant stress-test it. If it only works in the best case, it doesn’t work.
For a broader look at risk, read Is Buying a Franchise Safer Than Starting My Own Business?
Let’s Run the Numbers Together
If you’re looking at a brand and want help making sense of the earnings picture, I’m happy to talk. No sales pitch, just an honest look. Call me, John Henning, at 267-417-4980.
Sources
- FTC, A Consumer’s Guide to Buying a Franchise (Sept. 2020): https://www.ftc.gov/business-guidance/resources/consumers-guide-buying-franchise
- FTC Franchise Rule, 16 CFR Part 436 (eCFR): https://www.ecfr.gov/current/title-16/chapter-I/subchapter-D/part-436