Financial Modeling: Build a Realistic Franchise Budget (Step 9 of 18)
Financial Modeling
What it is and isn’t
It is Assumption based
It Needs to be stress tested if your revenue is higher or lower, if your net is higher or lower
Make sure you include a salary for yourself and, eventually, a manager.
Can you handle debt? How much?
What Items to use
Build you financial models with items 5, 6, 7, 19 and look at the franchisor’s financials in Item 20
Item 6- List out all ongoing fees and add them to your pro forma. Also, look for liquidated damages and ask if these can be negotiated lower. They should never amount to too much because you pay them when your business goes under so these can sink you financially.
Item 7- these are typically startup costs + only 3 months of projections. You can divide the ongoing costs by 3 and add that to your proforma. These could be old numbers and material cost can inflate quickly.
Item 19: these are past financial performances. It could be one table with average revenue of all franchisees which is not super helpful. Or it can be broken down to full P&Ls for most locations. Validate these as much as possible
Your broker will give you more resources to build good models during the process.
You must validate these numbers!
You will need to ask franchisees what is missing from the item 7, how much they made in what timeline, gross and net margins, and more.
You will need to do your own research for local costs- how much is rent, insurance, gas, etc where you live?
Sometimes the numbers in the FDD can be a big range. This is usually due to variance in territories and the owner’s ability to run the franchise. You need to validate this as well, do you have a good territory? What are the KPIs to tell? What makes a good owner? Does that align with your strengths and weaknesses?
You need to understand these numbers yourself. Sometimes the startup costs include everything you need plus $50,000+ of working capital. This is great, you should have more than you think you will need. However, many franchises have the bare minimum of what an owner may need and you should actually plan for a higher investment. This is why it is so important to ask every franchisee you speak with how much they invested before they broke even and how much longer it took before they could start paying themselves. Remember, you still have personal expenses you have to cover until your business is profitable enough to live off of. If the business is going to become your sole source of income then you need to add a line item to pay yourself.
What it is and isn’t
It is Assumption based
It Needs to be stress tested if your revenue is higher or lower, if your net is higher or lower
Make sure you include a salary for yourself and, eventually, a manager.
Can you handle debt? How much?
What Items to use
Build you financial models with items 5, 6, 7, 19 and look at the franchisor’s financials in Item 20
Item 6- List out all ongoing fees and add them to your pro forma. Also, look for liquidated damages and ask if these can be negotiated lower. They should never amount to too much because you pay them when your business goes under so these can sink you financially.
Item 7- these are typically startup costs + only 3 months of projections. You can divide the ongoing costs by 3 and add that to your proforma. These could be old numbers and material cost can inflate quickly.
Item 19: these are past financial performances. It could be one table with average revenue of all franchisees which is not super helpful. Or it can be broken down to full P&Ls for most locations. Validate these as much as possible
There are a lot more notes on these items in the FDD research tab.
You must validate these numbers!
You will need to ask franchisees what is missing from the item 7, how much they made in what timeline, margins, and more.
You will need to do your own research for local costs- how much is rent, insurance, gas, etc where you live?
Sometimes the numbers in the FDD can be a big range. This is usually due to variance in territories and the owner’s ability to run the franchise. You need to validate this as well, do you have a good territory? What are the KPIs to tell? What makes a good owner? Does that align with your strengths and weaknesses?
