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This business coaching lesson teaches about the franchise financial model.

Results-Focused Training, Tools, and Workshops from Expert Business Coaches.

Featured Coaching Excerpt - Notes & Transcript, Part 1
  • Definition Magician: Pro Forma - A method of calculating financial results in order to emphasize current or projected figures.
  • Success Principles: 1. Operate on a 30% profit margin
  • Success Principles: 2. Ensure franchisor receives a 6-8% fee from franchisee
  • Success Principles: 3. The franchise must be turnkey. (It must have a proven, successful business model and merely requires investment capital and labor.)
  • Definition Magician: Variable Costs - Costs that vary depending on the company's production.
  • Action Step: Determine your variable costs based on different potential levels of production.

[MUSIC PLAYING]

-It's $5,000. So his profit equals $5,000. All right, Thrivers-- we are talking about Pro Forma creation for franchising. Creating a Pro Forma for franchising. What's a Pro Forma? A Pro Forma is basically like a projection of the financial results of a company. You're kind of to looking into the future and saying, if we do this and we do this, then this should happen. It's kind of the math. And so what you do to make this Pro Forma, and I'm going to kind of get into.

Because in franchising you've got three kind of magic ideas that we did not get lost on. So we're going to put these over here and need to look at these magic ideas we need to say, we'll come back to these. We can't lose them. We have to be in a 30% profit margin. After paying everybody, we have to be at a 30% profit margin. We also have to make sure that the franchise gets a 6% to 8% fee from the franchisee.

So the franchisee, the guy who buys the franchise from you, he's called the franchisee. He's going to pay you 6% to 8%. He's paying you. You're the franchisor.

AUGUSTINE IACOPELLI: Now is the 6% to 8% taking away from the franchisees 30% profit?

CLAY CLARK: Great question. I'm going to break that down in just a second. But it's an excellent question. 100% we'll tackle it. So 30% profit, 6% to 8% fee goes back to the franchise. Fee for the franchise. And it has to be turn key. Scalable. Duplicatable. This is what has to happen. So as you build this Pro Forma, what you do is you go, what are our hard costs? Some people might call this a fixed cost.

What are the hard costs? I'm going to go through them here. One is real estate. What else? A lease, maybe. What else? Well, maybe if I got a loan. If I got a loan to buy the franchise. What else? That might be my utilities. What else? That might be advertising. What else? That might be technology. What else? That might be-- we could just go on and on. Anything that's a fixed cost, you want to go ahead and put that on the hard costs.

Now on the variable costs, the variable costs are the costs-- basically I'm going to put up here per transaction. So let me just give you an example. Dan owns a company called Dan's Lemonade Stand. And whether this lemonade stand has one customer or 50 customers, Dan pays $500 per month to lease space to put that thing. He pays $500 a month to lease space, whether he has any customers or not.

But every time he sells a glass of lemonade, he sells it to you for $2. It cost him $1 of supplies per glass. Then he has to pay somebody to work in the lemonade stand. And because his business sucks-- he's a good guy. He's a great guy, but it's terrible. He's a great human. Great dad. He's a great kind of buddy you want to be hanging out with. He's captain of the basketball team. He's just a great guy. But his business is just terribly. He's not selling vacuums, so it's not good to suck. It just sucks.

This guy, he's struggling. So what happens is he only sells 10 lemonades a day. So he has to pay $10 per glass for labor, because the only sells 10 classes a day. That's not a good deal. But if the guy was selling-- say Dan's business is awesome and Dan's now selling 1,000 glasses a day, you've got to figure out what's your labor per glass. So your labor per glass. And you want to begin to figure out what does it cost for are the actual cost of the cups.

In theory, you didn't have to pay for the cost of cups unless you sold something. So in theory you don't buy cups unless you're selling something. So that's part of it. This is all added up. When you add up all your hard costs, all your variable costs, at the end of the day you want to figure out how much-- at the end of the day, how much profit do I make per month?

Featured Coaching Excerpt - Notes & Transcript, Part 2
  • Lesson Nugget: Your net income can be found by taking your sales revenue, and subtracting your hard and variable costs from that number.
  • Lesson Nugget: If your profit margins aren't around or above 30%, you will have a hard time selling any franchises.
  • Fun Factoid: An FDD is a legal document which is presented to prospective buyers of franchises in the pre-sale disclosure process. It is a way to disclose franchisor information to prospective franchises.
  • Lesson Nugget: The FDD will show you not only who has bought a franchise in the past, but how many of them have failed.

[THEME MUSIC]

CLAY CLARK: So let's just take this as an example. Let's say at the end of the month, his hard costs are $10,000. That's his hard costs. And his variable costs end up being 50% of every transaction. But this month, he did $30,000 of sales. Let's figure out how much profit he has left.

He has $30,000 of total sales. These are his sales right here. This isn't profit. This is his sales. He has $30,000 of sales. You subtract $10,000 of hard costs. Now, we have $20,000.

But we had already said, really of that $30,000, we already said 50% goes away. So he actually only has $15,000. And out of that $15,000, he takes the $10,000. Now, what does he have? He has 15 minus 10. He has $5,000. So his profit equals $5,000 of profit.

And again, anybody who watches this is like, what are you talking about? The point is, again, he has $10,000 of hard costs. And he's bringing in a total of $30,000 of sales, half of which gets eaten away at the cost of cups, labor, supplies, whatever. So he has $15,000 left. He subtracts the $10,000 expenses. He has $5,000.

Well, because we are good at math here at Thrive15.com, oh, yes, we are, we're going to go ahead and take our $30,000. We're going to go $30,000 times and we go, well, 0.3. We do some of that math here and we kind of get in here and we do some of that math action. And we go, well, about $9,000 of profit would be 30% percent. So let's just say roughly $9,500-- not using a calculator today. Going calculator-free, folks-- so we need to get to $9,500.00.

Uh-oh. We're not there. We only have a 15% margin. Now, corporate comes in and says, hey, we need our franchise fee. Well, you take 8% of the total. Now, you're down to an 8% profit.

Now, the franchise owner's like, you mean, if I work all month and I do a ton of business, I only get to keep maybe $2,000 or $3,000 for the whole month of working? Yep. Good luck selling that.

Now, let's do another example. Let's say this month, though, man, you got a turnkey system and things are rocking. Now, you can sell $60,000. So instead of selling $30,000 you're selling $60,000. This is the hot sauce. You have this new turnkey marketing plan where your top in Google, your mailers are hot, people love your drink, they're on social media referred-- you bring in $60,000.

You take 50% of that and you pay that in cups and costs and supplies. So now, you've got $30,000 left. You take the $30,000. You subtract the $10,000 from it because that's our hard cost and now, you've got $20,000 of profit on $60,000 of sales. Do you know what that means?

If it was, again, $60,000-- you've got $20,000 profit. That means that you have roughly a 30% profit margin. Then, you take 8% of your total and you pay corporate. Now, you're about 22, 23. Ah, now, you are in a good spot. So you want to get to 30 before you pay the man, before you pay corporate.

So what you're going to do now, if you're corporate and you want to sell some franchises-- you're the franchisor. You're corporate. You want to sell some franchises to franchisees, you need to go back to the woodshed. And you go back to your workshop. You go back to your business and you go, wait, guys, we've got to cut the utilities. We've got to get these franchisees to be more successful. So you cut your utilities a little bit.

Now, all of a sudden, now your total costs are $7,000. And you want to do whatever you can to set up the franchisee for success because here is the problem. When I sell you a franchise, I am required by law to send you a franchise disclosure document before you buy one.

[FIREWORKS]

So I don't care where in the world you are. Let's just pretend, though, that you're-- oh, wow, this is an accurate map. This is the USA here. And you said, hey, I live over here in Florida and I would like to buy one of your franchises. I say, sure, but I've got to send you the FDD. Guess what's in that FDD?

MAN: All the financials.

-And guess what else?

-How much profit's expected on the business.

CLAY CLARK: The cell phone number of every franchisee. So I have to disclose failures. So if you get that in the mail and you're like, I'm excited about this lemonade stand company-- it's awesome. And you read through it. You're like, page two, page three, page four, things are going good. And then, you're like, oh, I'm going to call some of the franchisees.

[BEEPING]

Hey, I'm looking to buy a Dan's Lemonade Stand. I saw you bought one. How are you doing? I'm bankrupt. Next guy--

[BEEPING]

How are you doing? I'm bankrupt.

[BEEPING]

I'm bankrupt. Pretty soon, you're like, wow, everyone who's ever bought one of these companies is losing money. Or if you don't call them but you just see on the disclosures how many failures they've had, you're probably not going to buy one. So you've got to focus on a 30% profit.

MAN: So the FDD includes everybody who has ever purchased a franchise.

CLAY CLARK: Like their addresses and phone numbers.

-OK, wow.

CLAY CLARK: It's crazy, yeah. So you've got to be super duper detailed on that stuff. And what's crazy is that a lot of people want to sell a franchise and they don't have a model worked out yet that works at 30% and they start selling them. And that's really fun until they all fail.

MAN: Yeah, that's great.

-And then, you--

[EXPLOSION]

So when you ask the question, is my business franchiseable? Is my business the right kind of business to franchise? What do I need to do to make a pro-forma for my business? This is what you need to do. You need to sit down right now and begin to put all your hard costs down. Put all your variable costs down. Look at it and go-- and that's factoring in every expense, marketing, advertising, labor, everything.

Are we going to get to a 30% profit and does the franchisee have enough money left to pay me 6% to 8%? Is it turnkey? And if you can satisfy those, then you want to start selling them because at that point, you can begin to know that you're not going to have failures happening all over the country. Make sense?

MAN: Yeah, absolutely.

-Awesome. Boom.

-Boom.

[WHOOSH]

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