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Nick
Is there any way I can compute the average gross sales
of a franchise using a franchisor's financial reports?
From franchise attorney Jeff
Haff
Dennis:
It is a VERY dangerous exercise to estimate anything.
It is even more dangerous to "estimate and average."
For example, in 1960 the Philadelphia team had a basketball
game where they scored around 160 points and played 8
guys. So, the "average" guy got around
20 points.
Well, that was also the night that Wilt Chamberlain scored
100. No one else got 20. Had you bet money
that one particular player would get at least 20, you
had an 87.5% chance of losing. You really do not
want the "average" sales what you want is the
"median" sales figure. There is no way
to figure that out without data from every single franchisee.
To answer your question, however, you COULD do a mathematical
calculation to get an estimate of the average sales.
1) Read the proposed contract and find out the royalty
percentage.
2) Find a line on the financial statement that identifies
royalty receipts from franchisees (the UFOC has financial
statements and they often break this figure out).
3) Read the UFOC's section that sets forth the number
of existing franchisees per year.
OK, so you have the percentage each franchisee pays (say
5%) you have the number of franchisees (say 100) and you
have total franchisor revenue from royalties (say $1,000,000).
The average received per franchisee is $10,000 ($1,000,000
divided by 100). $10,000 divided by .05 (the royalty rate)
equals $200,000. So, your franchisee average revenue
is $200,000.
This calculation is so fraught with error that I can recommend
it for only to check on how POORLY a franchise system
is doing. If the system is bringing in $300,000
a year in royalty revenue and it has 1,000 franchisees,
the franchisor is clearly lying to you if it says that
all of its franchisees are doing well.
I apologize if my math is poor.
Jeff Haff
From franchise attorney Warren Lewis
Dennis:
I agree with Jeffrey's math and generally agree with his
observations about relying on "averages."
It is helpful to calculate an "average" unit
revenue number, but you should not assume that most franchisees'
revenues equal or exceed the average, or that your revenues
will equal or exceed the average.
Warren Lewis
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