Prime Costs, Operating Expenses, and Profit

Prime Costs, Operating Expenses, and Profit are three of the four parts of a Profit and Loss Statement.

In a previous blog, I talked about the Importance of a Profit and Loss Statement (P&L).  In this blog, I’ll walk through a P&L and look at it from a perspective of the prime cost and the operating expenses that you look at to manage your business. The P&L is a critical tool to guide you through your plan to make your business profitable.

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Franchise Store Closings

Why Do Franchise Stores Close?

It’s the elephant in the Discovery Day Boardroom; Franchise Unit Closures. The Franchisor may not even bring up the fact that there have been store closures under their watch, but it’s important for you as a potential buyer to find out how many and why. In today’s post, I’m going to cover:
1) the reasons why a franchise store may close, 2) how closures reflect on the brand, and 3) at the end of this post, I’ll discuss a metric tied to store closings that can help you reduce your risk when choosing a franchise.

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10 Steps to Opening a Franchise

In this Blog Post, I’m going to share with you the 10 Steps to Opening a Franchise.

Opening up a franchise or any small business can be daunting. There are hundreds of tasks that need to be completed most, within a certain time-frame. Risk increases with ignorance and to that end, its important to understand the big picture, the context of the entire sales and development processes. In this article I’ve outlined a high level overview of the how to open a franchise unit. Its important to note that this post is intended to be a road-map. The specific how-to’s for each task will be covered in a separate posts.

With just a few exceptions, this process can be used to open any small business.

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What I Would’ve Done Differently – Episode 3

Steve here; today I’m going to share with you What I Would’ve Done Differently. Though the list is endless, I’ll key in on one point.

In 1991, I signed up for my first franchise, and in 1992 I opened it, knowing next to nothing about what I was doing. I ended up in a spot that was extremely lucrative and we did very, very well in sales. My lease mimicked by franchise agreement, which was 10 years with two five-year options. Not realizing that leases do eventually come to an end, I ended up a business performing in the top five of the concept fleet; we were probably number three. The value of my business at its peak, and I went right through it. By the time I realized I should have sold, it’s now too late.

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WHEN TO SELL YOUR BUSINESS

by Steve Slowey

When is it time to sell your business? I can tell you the time NOT to sell your business is when you’re losing money. We’re going to make an assumption that your business is profitable, and that is definitely the best time to sell it.

I have a question for you. If you were to invest $1 million dollars and over a 4-year period, that million dollars was given back to you, and at the end of that 4-year period, you were given an additional $400,000, would you do it? If the answer’s yes, then I agree with you. I would do it too. Let’s talk about what I just said.

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What Is The Total Investment Cost?

By Paul Giggi

Question 1 of 5 in the Blog Series: Top 5 Questions To Ask a Franchisor

If you haven’t had a chance to see our Video on this topic I would like to suggest you do so. For this blog we will focus on Question #1 of our Key 5 questions to ask the Franchisor.

At your first introduction to a Franchisor, there are many questions to consider asking. Some are more important than others in the initial phase as you try to determine if a particular concept and Franchisor is the right one for you to partner with in operating the business.

The first of our 5 Key Questions to Ask:

What is the Total Investment Cost?

You’ll probably come to the table knowing your total available investment capabilities. But to ascertain if you can afford the cost and risk of the venture, you need to understand the Total Investment Cost of the Franchise. Asking the question about Total Investment Cost has many parts to it, so be sure to ask for specifics and fully understand the reply.

Franchisors are governed by the Federal Trade Commission and, therefore are restricted in the detail of the information they can share as they are not allowed to make an earnings claim to prospective Franchisees.  This is to protect them (and you) as you move forward in your due diligence. Without this protection the Franchisor could fall prey to lawsuit liability; if they tell a prospect what they will see as a return and that return is later not realized. It protects you from unscrupulous Franchisors that otherwise might offer false financial promises and information so to entice you to become a Franchisee.

Franchisors are normally going to share with you a range of costs for the complete operations build-out and opening of a single unit. Within this range are numerous items to be sure to understand and discuss. Many of these costs are disclosed in the Franchise Disclosure Document that you will receive as your next step in the qualification and discovery process.

The range offered could be small or large depending on what type of construction (i.e. free standing, end cap, in line, etc.…), the purchase approach (build to suit, your own build, lease, etc.…),  and other important components. When this range is offered to you, if some of these items are not offered immediately, be sure to ask what category the range covers and then discuss the inclusions and exclusions of this range so you have a firm understanding of what additional costs you may have to incur.

Typically, the range will cover your construction costs, FF&E (Furniture, Fixtures and Equipment), permit costs, opening inventory, signage, POS (Point of Sale) systems, opening training costs, opening marketing costs and may even include a certain amount of working capital. There will be more items included and be sure to ask what items are in the range. Also, and as important, be sure to understand what is not in the range.  Often items such as your Real Estate costs and liquor licensing (if applicable) will not be included. Once you have the “all in” figure you are prepared to review the Franchise Disclosure Document (FDD) with a better understanding of the cost areas to target and get a clear understanding.

This question is an important one to fully understand and you may want to consult with those who are current franchisees of a concept or with people who have experience in this area so to be sure you leave no stone unturned in your informational search.

Please check out our Video and watch for future blogs on the other important questions to ask of your Franchisor.

Want to Purchase a Franchise but not sure if you Qualify?

By Paul Giggi

If you have decided to purchase a franchise one of your first considerations may be questioning if you and your partners will meet the qualifications of the Franchisor. This is a reasonable question as you don’t want to spend too much of your time and energy researching a concept and managing through a process, if you don’t qualify and the Franchisor will not want to begin investing time in discussion and research with you and your partners if you don’t meet their qualifications hurdles.

There are a few standard hurdles that you should understand and so you can make a self-evaluation with regards to in your moving forward strategy.

Experience

Some Franchisors maintain minimum requirements regarding experience while others may not be as demanding of your background.  In the restaurant industry the typical requirement will be linked to your background and normally the requirement will be restaurant experience for a certain period of time or experience in managing a business enterprise and its P & L.  This should be an easy self-audit, but if there are questions in this area be sure to ask the Franchisor for clarity before proceeding.

Financing

In this area you will often find more stringent qualification hurdles. The two typical financial items that will be highlighted are minimum financial resources on you or your partnership in both Liquidity and Net Worth.

·       Liquidity refers the amount of money that you have easy and quick access to and that you wouldn’t have to add debt in order to access.

·       Net Worth is a set formula; basically your current assets minus current liabilities yielding a dollar amount of which your financial portfolio is valued.  The Franchisor will normally have a format for you to use to determine your net worth but, if not, there are many templates you can access to calculate for yourself. The SBA provides a good one to use.

If you don’t meet the financial hurdles the Franchisor maintains, they may suggest you try to add a financial partner and if that is not feasible, may deny you approval to be a franchisee.

Typically, the financial hurdles set by the Franchisee are in place to assure that the Franchisee prospect is not going to over reach their financial capabilities to develop and operate the concept thus causing greater risk of failure for all parties.

Background Checks and Credit Checks

A Franchisor will make it a part of their approval process to complete a Background check and a Credit Check of you and/or your partners.  This is to assure that you have a strong track record of managing your debt and that you have shown fiducially responsibility. The Franchisor is entrusting their brand name and concept to you and they need to be sure you will handle it in a professional responsible manner.

Approval Process

There are other components to your being approved through the Franchisor’s approval process that we will cover in future discussions.  The above noted items are those that you can check for yourself before spending much of your time and/or money in the pursuit of a particular franchised concept.