No one wants to buy an unprofitable business. Or, at least, not one without profit potential. But how can you gain an accurate picture of the profit in a business before you invest your hard-earned cash? The truth is that, unfortunately, you can’t. Business is risky and nothing is guaranteed. But this doesn’t mean that you can’t forecast future profit scenarios based on key financial indicators. There are a number of things you can look at to gain confidence in your acquisition.
In this article, BlueRock Accounting Director and franchise industry expert, Aaron March shares his accounting tips to understand how much money a franchise might make.
Compare the Balance Sheet with other Franchises
A great benefit of being part of a franchise system is that there are likely other businesses very similar to the one you’re considering purchasing. Ask the franchisor for financial information on a range of businesses in a similar area and with similar characteristics to the business you want to buy.
If you’ve had experience with a financial company, you’ll be no stranger to the saying that “past performance is no guarantee of future results”. While there’s an element of truth to this, past performance is beneficial when it comes to gauging the potential profit you can expect from a business. But, use a critical lens when looking at financial information provided by a seller because they'll be putting their best foot forward.
The more information you have under your belt, the more you'll understand of the good, the bad and the ugly of a potential business, ensuring you go into the acquisition with your eyes wide open. Hesitation or inability from the franchisor to provide you with the relevant information might be an insight into how they may operate.
A Franchise's Profit is About More Than Revenue
As a potential franchise buyer, you should have a clear understanding of what profit is. Revenue; gross profit; earnings before interest, taxes, depreciation and amortisation (EBITDA); earnings before interest and taxes (EBIT); net profit; net profit after tax (NPAT) are all things that will contribute to your business’s ability to generate profit, which is crucial to the success and survival of your business.
As the old saying goes, “revenue is vanity, profit is sanity, and cash is king”. After buying stock, equipment, paying the ATO and making loan repayments, business owners will quickly learn that the most important number is how much cash is left over.
Keeping this in mind, it’s in a potential franchise buyer’s best interest to investigate how much cash the previous owners took out of the business over the 12 months prior, as well as making similar enquiries with the franchisor about comparable sites.
Solve Other Franchise Profit Clues – Gross Profit and Beyond!
Apart from cash, there are other financial indicators that will suggest how a business will perform. Most typically, a business will sell something, and there will be costs associated with the sale. These costs are known as the Costs of Goods Sold (COGS). As an example, the COGS of a clothing retailer is the amount the company paid to purchase or manufacture a shirt. The sales amount less the COGS is known as the gross profit. The bigger the gap between the amount the company purchased the shirt for and the sale price of the shirt, the better. The gross profit divided by sales will display the gross profit margin; again, the higher the better.
The gross profit is then used to pay all other business expenses (including wages, rent etc), after which you are left with a profit or loss. The profit divided by sales will display the net profit percentage, which can be used to compare other opportunities.
Uncover Opportunities to Make a Franchise Profitable
The numbers are one thing, but there may also be hidden opportunities for profit within the franchise operation you’re considering. Operational inefficiencies can make or break a business, particularly when it comes to franchise systems built to scale.
Find out as much as you can about the systems architecture and operational processes of the franchise you’re looking to acquire. If there’s a lot of manual input you can guarantee there is double (or triple!) handling of data and key information, leading to wasted time and money, as well as the potential for error.
Effective software systems that are well integrated and supported not only improve the efficiencies of a business but also lead to an improved customer experience, which, of course, leads to more sales and – you got it – profit! Plus you’ll have the added benefit of better data and performance insights you can use to make more informed business decisions.
While they're not all created equal, there are some common tax planning strategies for franchise businesses that will help you maximise your annual tax lodgement.
Talk to BlueRock's Franchise Advisory Experts Before You Buy a Business
BlueRock’s franchise industry specialists provide a one-stop-shop for all your franchise needs. We work with a large number of well-known brands within the franchise industry and act on behalf of franchisors, franchisees and owner-operators.
Without much experience, financial statements and digital systems can be complex. We understand that the purchase of a business is a significant decision, and suggest you seek professional advice should you need any clarification with financial information such as the indicators mentioned above.
Once you have gathered and interpreted the available financial information, you’ll be in a strong position to establish a range of achievable business profits. Ultimately, where you land within the range is determined by your motivation, drive, skills and abilities as a business owner.
Reach out to our franchise team today to discuss your ideas and opportunities.
