How much money can a franchise make?
This is the biggest question & unknown factor
Here’s my process to create a simple multi-unit pro forma:
This pro forma is modeled off a territory-based home service concept that uses 1099 contractors such as painting, floors, cabinets, roofing, windows, etc
If you’re new to P&Ls don’t be intimidated. Everyone knows nothing before they know something
Simplify the P&L down to four major categories: Sales, Gross Profit, Variable Expenses, Fixed Expenses
I build out the “mature model” to estimate what the mature business can do. Then I back into the ramp-up period for the first 12-24 months
Look for data from four sources:
1) The FDD
2) Franchisees
3) Industry Data
4) Competitor FDDs
Sales
I estimate sales at different levels. A multi-unit operation will have winners & losers. In our auto repair business, we have shops that do $2.8M (print money) & $600k (burn money)
Build out 5 different levels of sales:
Gross Profit
Gross Profit is sales minus the direct costs of generating those sales. I only include materials & direct labor. For example, paint & painters or floors & installers, etc. I don’t include royalty, management costs, or any other expenses besides these two.
Leverage the same sources (The FDD, franchisees, competitor FDDs, & industry data) to estimate the gross profit margin.
I find a range of 48% to 52%. I’m comfortable with a 50% gross margin.
Variable Expenses
You will find most of these in Item 6 of the FDD.
Royalty, Advertising, Brand Fund, Call Center + Credit Card Fees
Variable expenses are directly tied to sales. They go up when sales go up. They go down when sales go down.
Fixed Expenses
Every business will have the same major categories
- Manager (% of sales w/ guaranteed base)
- Rent/Utilities/CAM/Taxes
- Software Subscriptions
- Liability Insurance
- Auto Expenses
- Professional
- Recruiting
I estimate these expenses by talking to the franchisor & franchisees, local business owners, & industry professionals
Mobile businesses will have low (or zero rent) but incur auto & fuel expenses. Use some common sense. This is an art, not science.
Regional
In a multi-unit operation, you’ll have a Regional Director to run the day-to-day. This could be you or an employee.
- Compensation (salary, bonus, benefits)
- Rent/Utilities – office/conference space
- Office – virtual assistant/bookkeeper
- Professional Fees – CPA for taxes
- Insurance – cheap since he mainly works in office
- Tech – company-wide communication (slack, teams, etc)
Operating Profit
Because most expenses are variable(COGS, royalty, manager comp) in this model, our unit-level margins are steady between 18% and 21%
How many units can a Regional Director oversee?
In most businesses, it’s 5 to 8.
We could add another $200k+ to the bottom line if this Regional Director could effectively operate another one or two more locations.
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Cheers!
