One key area to consider when assessing a franchise is if you can live off the income the business is likely to generate.
Tips on how to work this out were shared by Franchise Accounting and Tax founders Peter Knight and Kate Groom at the Australian Franchise Expo Online.
So where do you start when working this out?
Firstly you need to assess how much income you need.
Peter and Kate warn that if you were in a very well paid corporate job you might need to adjust your income expectations, especially in the first few years.
They suggest looking at what you need versus what you would like, and also warn it’s important to get everyone in the family committed to what that shape of family life might look like.
They also flagged it’s important to be aware that the money you’ll take home from your business is different to the money you bring in, as you’ll need to pay suppliers, rent and other business expenses, as well as need working capital for the running of the business.
You also need to look at how long it will take the profits of the business to pay back the loan and the initial investment in that first term of your franchise agreement, after paying yourself.
Once you’ve figured out the number of sales minus expenses to support the level of income needed, you then need to figure out if that level of sales is achievable.
Peter and Kate warn you’ll want to see multiple bits of evidence that, that level of sales can be achieved.
If you’re buying a new franchise site, you should still be able to access sales information from like site that already exist in the franchise. If it’s an exisiting business you can look at historical sales data.
If this all seems a little overwhelming there are a range of professionals who can assist you, as well as a number of sessions offering tips and tricks on how to figure this out for you, in the Franchise Finance stream in the education sessions as part of the Australian Franchise Expo Online.
So to recap, the three questions you need to answer when assessing if a franchise is right for you:
- How much income do you need?
- What sales are needed to generate this income?
- Is that level of sales achievable?
Good luck with your research!