There are four main mistakes that I have seen in my 15 years of being a franchise consultant. Here we cover the most common one.
The most common & biggest mistake people can make when buying a franchise is not fully understanding the financial analysis of how much is needed for the investment and how much and/or how quickly one can make money.
This is by far the most difficult part of analyzing a franchise. Part of this complexity comes from the extensive regulations the Federal Trade Commission has placed our industry; this means what a franchisor can and cannot provide, in regards to earning information, is legally restricted.
However, whether a franchisor provides earnings information in their FDD or not, the best way around these regulations is to dive deep into franchisee validation. Franchisees are allowed to discuss earnings with potential franchisees. Specific earning validation with current franchisees is one of the most important things you can to do to make sure the business can provide the return that you need, in the time that you need it.
Money can be a very sensitive issue for most people, especially discussing it with someone you have never met. So, how do you accomplish this?
- Understand your monthly budget (how much do you need to live & pay your bills). To be safe, you can make two budgets: one conservative and one that’s more realistic
- Develop financial projections and a model for expenses and earnings for the business years 1-3, these are estimates based on what may be provided by the franchisor, common sense, research, and “guestimates”.
- Validate the projection and model with the franchisees.
And remember, you never want to get involved in a business by guessing how much money you can make.
