Does your product fit your exact location?

Published in Franchise Buyer Jan/Feb 2016

This should be the biggest question asked in selecting and opening a new business.

If the business is already operating, then the past sales are a fairly good indication for the future sales.

On the other hand, if the business is a new business, how do you estimate what your revenue is likely to be? Whether it is a large franchised brand, your own independent coffee and/or cake shop, an ice cream or yoghurt store or any other retail business, the same basic questions need to be addressed.

How do you realistically estimate the sales in dollar terms that your new business will do?

If you are joining an established franchise chain, the Franchisor may offer to provide some information, such as the demographics of the area, and maybe a listing of phone numbers of other Franchisees for you to talk to. The final word from the Franchisor is along the lines of “Do your own due diligence, as I cannot say what sales revenues you will generate” (and you will probably be asked to sign a document confirming this).

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Forecast Profits & Losses

In most businesses, you think in terms of forecast profit, and you are relying on this to live, pay back your debts and basically secure your future. The simplest way in my view of looking at a forecast profit & loss (P&L) is as follows:
Sales Revenues — Very hard to predict
Less

1. Cost of Good Sold (factor of sales revenue)
   
2. Rent — Fairly predictable cost
3. Wages — Fairly predictable cost
4. (with some variable component)
5. Other (power, phone, all fairly small)
   

= PROFIT/(LOSS)

If the Sales Revenue is out by a fair percentage, say +/- 50%, then the effect on the bottom line is either fantastic
or catastrophic.

How we do a good estimate of future sales is the “$64,000 question”!

We can:

1. Look for similar businesses and try and ascertain their sales — the “Analogue” method.
   
2. Have confidence in your Franchisor that they are overseeing the site selection process and have some form of model or process to indicate to them the sales will be adequate.
   

Your sales estimate is the crucial number you will be building your business plans around, and the better the logic and the process that generates this, the higher are the chances of your business meeting your expectations.

Having confidence in your Franchisor that they have a proper site selection process is essential, as it is your money that is being spent. If the site is a “dud”, it is your money that will be lost, and unless you are prepared to run a very costly legal battle with your Franchisor, there is very little comeback.

The recent Gelare International case, where the Franchisor has been found guilty of misrepresentation, provides an indication of the inadequacy of some and, quite possibly, many Franchisors and the site selection processes they adopt.

It is critical that you treat sales predictions as a very important part of your decision to buy your new venture, and good luck with your new business.

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