Financial Analysis for Evaluating a Franchise opportunity

Guest post by: Ed Teixeira
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The Traits That Define Good Leadership - By Ed Teixeira

When evaluating a franchise opportunity there is typically a great deal of focus directed on the business concept, franchise contract, franchisor support and franchisee performance. Each of these areas rightfully deserve attention. However, one area that requires as much if not more focus is in the area of financial analysis. Although, the term financial analysis can conjure up visions of boring number crunching this activity is important when considering the purchase of a franchise as well as any business. Since you'll have a limited amount of capital to invest in the franchise you need to be on target when identifying your capial requirements. You should have an accountant or qualified financial advisor to assist you in the process. Here are some key items that need to be a part of the financial analysis: In-depth review of the franchisor's financial statements from the FDD. Unless you're dealing with the larger franchisor's you want to be sure that the franchisor has sufficent capital to operate the franchise. The franchisor shouldn't be relying upon initial franchise fees for their main source of funding or earnings. Fully understand Item 7 of the FDD. It describes the estimated investment in a specific franchise. Scrutiny of the franchise financial formula. This process involves indentifying and evaluating the components of the product or service sale leading to the gross margin. Sample sale price, product, labor costs, royalty and ad fees,etc. are in the formula. This is one of the most important elements of your financial analysis and may require you to do some "digging" to get all of the information you need. A 3-5 year Pro-forma income statement that projects sales, gross margin, expenses and earnings. You should be conservative and not aggressive when projecting. Feedback from current franchisees will provide valuable input when constructing a pro-forma. A cash flow projection for the first 3-5 years of the franchise operation. You need this to establish if your sales and income will be sufficent relative to your available working capital. If you and your advisor perform a thorough financial analysis, in addition to evaluating the other areas of the franchise opportunity, then your odds of choosing the right franchise will increase dramatically.

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The Traits That Define Good Leadership - By Ed Teixeira

About the Author: Ed Teixeira

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Ed Teixeira is a franchise expert with over 32 years in the franchise industry. During his career, Ed has operated franchise companies in diverse industries. He has conducted franchise transactions in Asia, Europe and South America. Ed is the author of "Franchising From The Inside Out" and has spoken on the subject of franchising in the United States and overseas. Ed is currently the President of FranchiseKnowHow,LLC which operates a website that publishes newsletters for franchisees and franchisors.He also provides consulting services. FKH is located in Stonybrook, NY. www.franchiseknowhow.com Ed can be contacted at 631-246-5782 and at franchiseknowhow@yahoo.com.
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