Evaluating Earning Potentail of Home Based Franchises

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How do I evalute the earnings potential of home based franchises?

Evaluating Earning Potentail of Home Based Franchises

It can be difficult to evaluate earning potential for any business but even more so for home based franchises. The tax write-offs and other benefits are a major consideration for many who are drawn to small business ownership, but making sense of earnings projections isn't always easy.

Use these common sense steps when evaluating earning potential of home based franchises.

1. Knowledge. Franchisors are not required to make earning claims but if they do make a claim then the Federal Trade Commission (FTC) requires them to substantiate those claims. Request an earnings claims document and read it carefully.

2. Read between the lines. Remember, you are reading legal documents so the wording tends to be very precise. For instance, if a franchisor states franchise owners earned $50,000 last year it doesn't mean that EVERY franchise owner earned $50,000…it just means some franchise owners earned that much. It might have been a very small number of franchise owners who earned $50,000 last year. Ask how many franchise owner or what percentage of franchise owners earned that amount.

3. Average and Medians. Closely related is the use of “average” earnings. Remember, if one franchise owner earned $100,000 and another earned $1 then the “average” was $50,000. While technically correct, it doesn't provide an accurate method for you, as a prospective business owner, to estimate what your anticipated earnings would be. A few very high earning franchise owners can bring the overall average up significantly.

4. Gross versus Net. Don't be easily impressed when you hear large gross sales – they mean nothing without the net! Gross sales simply tell you how much money was collected but without knowing what your expenses are, it is not a reliable indicator of profitability. Remember, if you set up a lemonade stand as a child and sold $5 of lemonade but it cost your mother $6 for sugar and lemons then you weren't really profitable at all! Calculate the cost of doing business!

5. Saturation. Even the best home based franchise opportunities can reach a point of saturation where less growth is anticipated. Be sure to pay special attention to trends, territories and other factors that could impact your franchise and remember, past performance is never a guarantee of future performance!

   

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