NEW YORK (CNN/Money) -
The people who consider buying franchise businesses range from laid-off managers to ambitious entrepreneurs.
"The restructuring of our economy has caused a lot of angst," says Steve Hockett of FranChoice, a franchise business broker. People laid off from long-term jobs don't want to go through that again. Their attitude, according to Hackett: "I want my success to depend on me."
"We're seeing 2,000 to 3,000 candidates a month," he says, adding that he expects inquiries to double by 2006.
And almost everyone starts with the same question: "How much can I earn?"
Actual performance may vary
"The difficulty obtaining information on how much you can make is the Achilles heel of franchising," said Peter Birkeland, host of the radio show Franchise Boot Camp. Of the 2,000 or more companies that franchise, few offer much data.
The Federal Trade Commission only mandates that any earnings estimates be accurate and made in good faith, and be confined to item 19 of the Uniform Franchise Offering Circular (UFOC), which the franchisee must receive before completing any deal.
Gene Gold opened a new Pearle Vision four months ago in Brewster, N.Y., after partnering in a Pearle store for 20 years in Stamford, Conn. He says the UFOC data the company provides is pretty accurate and that it also helps out with market surveys and even "sent its real estate experts to look at the location."
In its UFOC, Pearle lists mean average sales of $674,000. Pearle is one of the few franchisors to give details on its average store's net profit, about $96,000.
Most only list profits before labor costs, taxes, rent, and other expenses are deducted.
If the franchisor doesn't provide net profit estimates, candidates have to make an educated guess about what a franchisee can earn.
Some franchisors, make it easier by providing a range of performances.
Baskin-Robbins, for example, reports mean gross sales of $290,554 (fiscal year 2002) for its 4,500 ice cream stores, but breaks sales down by region. These range from a low of $186,906 in the Southeast to a high of $344,587 in the West.
The company includes data on average costs of food (27 percent of sales) and labor (21 percent).
A company's UFOC contains other critical information, such as franchise fees and royalty and advertising percentages, that eat into profits.
EconoTax, a tax service business with 68 locations in seven states, lists charges of $10,000 for a franchise plus a royalty of 15 percent of the gross and another 4 percent for advertising. Candidates would expect out-of-pocket expenses to total from $10,000 to $25,000 to get off the ground.
The company breaks down earnings claims by years in business, with a lowest producer, a highest, and an average. Locations in business five years or more grossed an average of $77,385 in 2002 with a high of $113,205 and a low of $27,462.
Pinky Jones, who has purchased seven EconoTax franchises in Mississippi says that she has found earnings claims estimates provided by the company very helpful. "They let you know what you're up against and give you the ability to know what your financial potential is in a given area," she says.
|Franchise||Business||Franchise fee, royalties, and advertising||Annual sales||Profit after cost of goods|
|General Nutrition Center||Vitamins & supplements||$40k, +6% & 3%||$349k||$173k|
|Pearle Vision||Eyeglasses||$30k, +7% & 9%||$674k||$467k|
|The Visual Image||Photography||$23.5k, +0 & 0||$101k||$77k|
|Wild Bird Centers||Birdseed & feeders||$19k, +3 - 4.5% & 0||$347k||$173k|
|Between Rounds||Bagel deli||$18k, +6% & 2% ||$493k||$308k|
|Dunkin' Donuts||Doughnuts||$50k, +5.9% & 5%||$813k||$626k|
|Juice It Up!||Smoothies||$25k, +6% & 2%||$212k||$149k|
|McDonald's||Hamburgers||$45k, +12.5% & 4% ||$1.3m||$916k|
|FastSigns||Signs & Graphics||$20k, +6% & 2%||$477k||$360k|
|The Glass Doctor||Glass repair||$18.9k, +6% & 2%||$798k||$554k|
|Jet-Black||Driveway repair||$15k, +8% & na||$94k||$73k|
|Source: "How Much Can I Make?" By Robert E. Bond|
Fast-food titan McDonald's breaks down earnings claims based on three categories of store volume: $1.3 million in sales, $1.5 million, and $1.7 million. All produced gross margins of 70 percent or better and an operating income margin of at least 24.6 percent. Out of that franchisees still must pay rent, income taxes, and other fees.
Going to the source
Where can you turn if the franchisor in which you're interested does not furnish earnings claims in its UFOC?
To get a preliminary idea of what a franchise may be worth to you, see the book "How Much Can I Make?" by Robert E. Bond, which contains franchisor-provided financial information from 137 different companies.
From there, says Steve Hockett, "candidates have to talk to established franchisees to get an idea of how much they could earn."
That can be inexact. Can you trust the un-audited estimates of businesspeople who possibly have reasons to conceal rather than reveal?
Robert Bond advises to tread carefully. Most people don't do enough research. "Call as many franchisees as possible," he says. Besides the monetary issues "find out if they're happy," he says.
Bond also advises that you hire an experienced franchise attorney and a business consultant.
A good broker -- Bond named FranChoice as one -- can also help. But remember that they don't work with the whole franchise universe; your choice will usually be limited to a basket of franchises 40 or 50 strong.
The beauty is that brokers provide a lot of service and don't cost buyers a cent. It's like real estate: the seller pays the commission. And to satisfy clients (the franchisors) the broker has to make good matches.
Many franchise buyers (60 percent, according to a FranChoice spokeswoman) obtain financing to pay their startup costs. When fees are fairly modest, say $150,000 or less, franchisees often get a home equity loan. Otherwise there are financial institutions, such as SD Cooper Company, that specialize in franchise business loans, and some franchisors will help guide new owners through the loan process.