When thinking about opening a business it can be extremely difficult or impossible to have a good understanding of the investment required to start the business, the on-going operating costs of running the business, top line revenues and profitability. Too often we assume that, if a company is in business they are making an acceptable profit. This assumption can be a mistake especially if an entrepreneur is using the assumption to make financial projections as part of their business plan or is seeking financing. One resource that I have found that provides a reasonable reality check for the financial requirements of a business model is franchise information. The franchise business model allows you to compare various types and sizes of operations and to evaluate and verify the represented results by contacting those franchisees currently in operation.
The January 2015 issue of Entrepreneur Magazine ranked the top 500 franchises based on certain criteria and listed them by category. Because we frequently have the opportunity to have potential business owners inquire about starting a restaurant, I looked at the various start-up costs for “Miscellaneous Full-Service Restaurants”; low end of startup costs ranged from $173K to $1.4M and a simple average of the nine listed was $784K.
For example, number eight, Denny’s, required a $1.3M to$2.6M investment while number 207, Johnny Rockers, investment of $539.5K to $975.6K was considerably lower. The lowest on the list was: Burgers, Shakes & Fries $173K to $324.6K.
I have also referred to the a particular franchises location and building requirements as a helpful way for clients to understand how much information franchise analyze in evaluating potential locations and the precise requirements for the facility. Many entrepreneurs evaluate these based on very little experience.
To supplement the franchise information, IBIS World and SageWorks reports provided at no cost for ISBDC clients, provide industry operating results.
Using a variety of industry specific reports provided by the ISBDC and actual investments as determined by national franchise firms, is one of the best ways to assure your financial assumptions are realistic as you are preparing your business plan.