Written By: Smita B

The franchise business model has grown significantly in the Indian market. Because it offers some exclusive benefits for aspiring entrepreneurs. For example, permission to use recognized brand name, centralized business operations, reliable customer base, and continuous training and support during business tenure. However, an entrepreneur has to consider a few aspects before buying a franchise business. The first and foremost important aspect is the evaluation of financial performance of a respective franchise business.

Especially when assessing the franchise’s financial standing, aspiring franchise partners need to think carefully. So, in this extensive guide, we will examine some crucial elements of franchise financial performance. These elements will assist an aspiring franchisee in the evaluation of financial performance.

The prime goal of this article is to provide the right information and resources knowledge to potential franchisees. Eventually, it will help them to make wise investment decisions while selecting a profitable franchise business opportunity.

Key Indicators To Consider While Evaluation of Financial Performance

Complete financial performance information of franchise business empowers an aspirant in making appropriate franchise buying decisions. Aspiring franchisees can take the assistance of an expert franchise consultant. As it will help them to get appropriate franchise business advice.

However, prospective franchisees can evaluate the financial consistency, future growth, and feasibility of any franchise business. So, here is the ultimate franchise financial evaluation checklist for aspirants.

Franchise Financial Evaluation Checklist

Asses the Growth Of Franchise Business

Assessing the financial growth of a franchise business is an essential part of franchise business selection. However, it helps an aspirant to make the right decision regarding their franchise purchase in India.

Aspiring franchisees can obtain the financial stability of interested franchise businesses by using the following steps.

• Gather all past financial records of the franchise business i.e. sales report, balance sheet, tax records, etc. For example, ensure all income streams are included in the data and verify the statements with your financial advisor.
• Get a financial performance overview of a franchise by summing up all revenue sources. For instance, sales revenue, royalty, franchise fees, other service charges, etc.
• Analyze the collected data and figure out the franchise growth patterns and growth rate i.e. consistent growth, fluctuation, and declining phases of revenue performance.

Examine the Profit Margins Of the Franchise Business

By performing a profit margin examination, aspirant franchisees can review the financial health of the franchise business. However, to examine the profitability of a business, franchisees can consider following financial metrics.

• Determine the gross profit of the franchise business. After deducting the COGS ( Cost Of Goods Sold), find the gross portion of revenue. This gross profit margin eventually indicates the profitability of a franchise.
• Conclude the cost management of the business by analyzing operating profit margin. To define an accurate operating profit margin, eliminate the overall business operating expenses. For instance, utility costs, salaries, lease or rents, and external expenses.
• Evaluate the net profit by excluding all expenses i.e. rents, interest, wages, taxes, etc. Eventually, it will be a comprehensive review of the financial performance of a business.

Perform ROI (Return On Investment) Of the Franchise Business

Compute the ROI to verify whether the franchise investment is profitable. As a franchise opportunity with a higher ROI indicates the profitability of a franchise. Use the following steps to calculate the ROI.

• Sum up the exact initial investment cost i.e. franchise setup cost, franchise fees, operating expenses, etc.
• Compute the ROI using the general method i.e. divide the anticipated net profit by initial investment and multiply the result by 100 to learn ROI percentage.
• Some factors directly impact on ROI. For instance, market conditions, unstable revenues, expenses, etc. can deeply affect the ROI. Hence adjust the figures accordingly.

Analyze The Financial Statements Of the Franchise Business

Examination of the financial statements of the franchise is a very essential step, that potential franchisees have to conduct. It will help them to fully comprehend the financial situation and future prospects of the franchise business.

• Review all the financial documents of the business. Evaluate the performance of the business by this examination i.e. profit, losses, expenditures, operating cost, etc.
• Calculate ratios such as gross profit, net profit, product or service costing, liquidity ratio, debt to equity ratio, etc. It eventually will assist you in understanding the company’s economic conditions.
• Evaluate unite economics ( if data is available). Research the financial performance of single units. For example, pick and low sales periods, revenues, miscellaneous expenses, marketing expenditures, operating costs, etc.

Determine The Break-Even Point Of the Franchise Business

Break-even point analyses assist aspiring franchisees in making business-related decisions. For instance, setting sales targets, pricing policies, cost control strategies, etc.

• Identify all the fixed costs and variable costs associated with every unit.
• Based on fixed cost and variable cost, fix the selling price of a product or service.
• Calculate the contribution margin by excluding variable costs from the selling price.
• Define the brake even position in units. For instance, determine how much quantity is needed to be sold to cover all the costs.

Understand The Unite Economics Of the Franchise Business

Unite economics is the best way to evaluate the financial conditions of a franchise business. It usually involves the evaluation of the finances and profit margins of a single franchise unit.

• Collect the financial data of some franchise business units which consists of units or store's overall expenses, sales, profits, rents, salaries, etc.
• Compute the profit margins of every unit with the gathered data.
• Use this data to analyze primary sources of revenue and to project the growth areas to make comprehensive strategies to ensure investment security in the franchise business.

Compare The Financial Performance Of The Franchise Business

Aspiring franchisees have to gain valuable insights into a franchise business. Moreover, they need to check the financial performance of franchise businesses by comparing it with similar franchise opportunities.

• Collect the data of interested franchise businesses as well as their competitors or similar franchise businesses.
• Thoroughly evaluate the performance of every franchise business i.e. franchise fees, setup cost, royalty structure, sales, operating expenses, revenue margins, investment, etc. And compare the financial data to identify the loopholes and strengths of the respective franchise business.
• Compare the portability ratios and cost strategies to make the right franchise investment.

Evaluate The Overall Franchise Business Cost

Potential franchisees can make well-informed decisions by evaluating overall franchise business investment. Generally, the franchise business includes the following financial elements.

• Initial investment includes franchise fees, franchise setup cost, property, inventory and types of machinery, etc.
• Understand the other payment structures like royalty, other franchise fee structures, and marketing and advertisement costs.
• Calculate franchise operating costs i.e. lease or rents, employee salaries, insurance policies cost, utility bill amount, etc.
• Acess other essential franchise costs such as supply chain cost, technology installation costs, marketing, training, support costs, and legal costs, charged by the franchisor.
• Franchisees need to consider the franchise renewal or exit cost too while evaluating the overall franchise business cost.

Conclusion

Franchise evaluation has become a necessity for every aspiring franchisee. Because it helps an aspirant to make the right franchise investment decision. However, many aspirants are unavailed with the appropriate information. Eventually, this illiteracy draws them towards failure in franchise business opportunities.

In franchise evaluation, the evaluation of financial performance of the franchise business is a very important aspect. Hence, potential franchisees are looking for information on “How to evaluate the financial performance of a company?”

However, the assessment of the financial performance of a franchise business in India is a very complex procedure. Additionally, it requires close attention to various franchise financial metrics. For instance, the franchise business's revenue, sales, expenses, operational expenditures, and so many other elements. Meanwhile, a lack of knowledge regarding these aspects, makes an aspirant more confused. Which lead them to make the completely wrong franchise purchase decision.

So, to exclude this confusion from aspiring franchisee's minds, we have shared some essential information. This information will guide the aspirants in the evaluation of the franchise's financial performance. Where we have mentioned the key aspects of evaluating a franchise and making a wise decision regarding franchise purchase. Ultimately it will ensure the success of their franchise business in the future.

Aspirants who are looking for more information about the overall franchise business. Moreover, want to learn the best suitable franchise option for them, can contact our expert franchise business consultant at FranchiseBazar.

Disclaimer: The brands mentioned in this blog are the recommendations provided by the author. FranchiseBAZAR does not claim to work with these brands / represent them / or are associated with them in any manner. Investors and prospective franchisees are to do their own due diligence before investing in any franchise business at their own risk and discretion. FranchiseBAZAR or its Directors disclaim any liability or risks arising out of any transactions that may take place due to the information provided in this blog.