When you’re searching for the right franchise, you’ll have lots of documents to read, plenty of people to talk to, and advice from all sides. One piece of the puzzle that many future franchisees overlook is the profit and loss statement (P&L) from your potential franchisor. A P&L lists the income, costs, and resulting profit or loss of a company, usually over a period of a quarter or year.
Many companies are required by law to prepare and file these statements, and it’s worth asking to see one even if the franchise you’re considering is not required to make theirs public. You might also ask to see a P&L when you speak to current franchisees. If you can get a profit and loss statement from a franchise, it can give you big insights into how the business is run and what kind of profits you might be able to expect.
Before you look at profits, take a close look at the expenses that a franchise might have. Depending on the franchise, expenses can vary significantly through the life of the franchise as well as seasonally. Be sure to look at expenses across a number of months, if you’re able, and look at expenses that reoccur.
Mandatory expenses, like franchise fees, royalties, and loan payments, probably won’t vary a whole lot between your future franchise and an existing franchise. Ask the franchisees how they feel about these expenses. Do they get their money’s worth? Other expenses that are mandatory but might not catch your attention include purchases which must be made through designated suppliers. Does the franchisee feel that the product they’re getting is worth the cost?
When mandatory expenses cut into profits significantly, it can make other choices more difficult and give franchisees less flexibility in other costs, such as staffing or professional education. On the other hand, those mandatory expenses can sometimes be key to overall profitability. Plenty of small businesses do without marketing, for example, and that’s rarely a good business decision. However, franchisees can usually tell you what they would do if they had more flexibility and knowing how they would spend extra funds can tell you a lot about what they think the franchise is lacking.
Once you’ve taken a good look at expenses, look at profits. What aspects of the business bring in the most revenue? Franchisees might have struggled to make these areas as profitable as possible, so ask questions about how they go there and what would happen if that profit started to dry up. Knowing the history of profits can also help you gauge the ability of a franchise to adapt to change.
Profit and loss statements aren’t always easy to come by, but the more relationships you build with existing franchises, the more information you might be able to acquire.
This article was originally published by America’s Best Franchises
Published: May 7, 2014