BY BILL BRADLEY | December 28, 2012
If you’re thinking about buying a retail franchise, projecting the cash flow of your operation will be pivotal to your success. Business failure or, in this case, retail franchise failure, is most often caused by the lack of investment capital and/or ongoing working capital. As a result, building a cash flow projection you can rely on is paramount.
Your first step is to evaluate the earnings claims statement provided by the franchisor. Unfortunately, not all franchise companies have earnings claims statements. If they do, you will utilize the numbers provided to assist in building your cash flow projections. Additionally, while in the validation process, you’ll want to interview current and former franchisees. Do not be afraid to ask all the right questions as they pertain to cash flow. You’ll need to clarify the front-end investment requirements as will as an estimate of the operating expenses of the business.
Some of the front-end investment requirements for your consideration are:
1. Initial franchise fee
2. Leasehold improvements
3. Furniture & fixtures
4. Vehicles to be purchased
5. Initial inventory
6. Signage
7. Initial advertising requirement of the franchisor
8. Any initial training fees
9. Rent deposits
10. Utility & telephone deposits if any
11. Yellow page advertising
12. Office supplies
13. Business permits and fees required
14. Office equipment including computer hardware & software
15. Telephone system
16. Copier
17. Loan fees if any
18. Accounting fees
19. Attorney fees
20. Initial working capital expenses
A few of the operating expenses of a retail franchise are as follows:
1. Payroll – including direct labor, indirect labor, employee benefits, and payroll taxes.
2. Owner salary and benefits
3. Rent and administrative costs
4. Equipment rental and lease payments if any.
5. Ongoing advertising fees
6. Insurance
7. Utilities
8. Operating supplies
9. Office supplies
10. Vehicle expense
11. Uniforms & laundry
12. Professional fees
13. Business licenses, etc.
14. Taxes
15. Franchisor royalties
16. Interest expense
In a retail franchise, the cost of goods sold, will come off of your net sales figure.
As you can see, there is a lot to think about when determining your financial budget, your cash flow, your working capital requirement, and your years to break-even. Further, you’ll need to assess the requirements of your family budget. Make sure you set enough money aside to pay your bills for at least 6 months. You do not want to dip into your family fund to keep your business afloat.
Your Pro Forma Cash Flow Statement will also require an estimate of your Gross Sales, less cost of goods sold. This is where your due diligence will come in handy. If you’re fortunate enough to have an earnings claim to evaluate, the job will be much easier. Either way, you’ll want to ask your accountant and your attorney for assistance in determining appropriate ratios for revenue. Also, the more cooperation you can get from current franchisees the better. This is a good opportunity for you to build a relationship with other franchisees. Find a mentor to help you in this regard.
Bottom line, is you need to make the financial decision the most critical step in your evaluation process. Do you have the risk tolerance to move forward with this investment? Do you have enough money not only for the business but for your family expenses as well? There are no shortcuts here. Leave no stone unturned and it will benefit you as your retail franchise grows.
