Building a financial model is a critical step before buying a franchise.
Most people are intimidated and don’t know where to start. They’ve never built something like this and assume it’s difficult and time-consuming.
Don’t worry—the process I will show you is simple but effective. I’ll also share the templates you can download.
I just released a detailed video that breaks down the entire process of building a financial model for a franchise.
Why Build a Model
A financial model should be able to help answer:
- What happens when I increase margins?
- How much sales do I need to break even?
- How do debt payments affect cash flow?
- How do more locations improve my profit?
The better you understand how the numbers relate to each other, the easier to make decisions to improve them.
Why Won’t The Franchisor Provide All This?!?!
It would be nice if the Franchisor shared detailed P&Ls for every franchisee in their system so you can know exactly what to expect.
Unfortunately, that’s not how it works. Franchisors provide very limited financial information to prospective franchisees. There are a few reasons:
Data collection – some Franchisees are very protective of their financials. They don’t want to provide more information than required and enforced.
Standardization – even if they have access, Franchisees don’t have a standard set of accounts. Every franchise owner has the right to run their accounting however they want.
Taxes – a Franchisee’s goal is to show as little profit as legally possible to reduce their tax bill. The Franchisor wants to see as much profit as possible.
Sourcing Information
Putting together the numbers is more of an art than a science. Gather information from:
Franchisor’s FDD – this document is filled with valuable information on financial performance, variable costs and fixed costs. In the video I go over what to look for
Resales – find resales of the same brand from re-sales websites. Fill out NDA’s to get a copy of their P&
Competitor’s FDD – for emerging brands in timeless industries the FDD of competitors may provide some insights. For example, a competitor may provide very detailed P&Ls that could help understand operating costs. Just remember they are completely different brands!
Market Research – contact a local realtor to understand occupancy costs. Use Indeed.com for wage estimates based on similar roles
Common Sense – nothing beats some good ole common sense thinking through the business.
The Three Big Categories
I’ve seen some financial models that are pages long and have dozens of expense categories. They try to detail every little item.
Don’t waste your time with that right now.
At this stage, you’re trying to determine if you believe the franchise is worth pursuing. Your goal is to understand the business at a high level. You can get granular on the expenses after you become a Franchisee.
All expenses fall into three big categories:
Direct Expenses – these are costs directly associated with producing the sales: cost of goods (COGS) and direct labor. Gross profit = Sales – Direct Expenses
Variable Expenses – costs directly tied to sales volume. The higher the sales, the higher these costs. Royalties, advertising, and credit card fees are most common.
Fixed Expenses – overhead to run the business such as rent, manager payroll, insurance, and other stable items.
Let’s Dive In
In my latest video, I walk you through the entire step-by-step process.
This isn’t a brief fluffy overview – it’s a detailed 30-minute video.
Check it out if you are serious about building cash flow & wealth through franchising
Download The Templates
👉 Click here to download a copy of the Excel templates
Cheers!
Brian
