The Franchisee's Numbers

How to calculate whether a franchise outlet makes money, including upfront investment, running costs, royalties and payback period.

Buying a franchise is an investment. The key question: will it pay back?

Upfront costs

Franchise fee.
Store fit-out and equipment.
Deposit and initial inventory.

Running costs

Rent.
Staff salaries.
Raw materials.
Royalties: often a percentage of sales.
Marketing fund contribution.
Utilities.

An example

A food franchise costs 40 lakh rupees to set up. Monthly sales are 6 lakh rupees.

Food costs (35 percent): 2.1 lakh.
Rent: 1 lakh.
Staff: 1 lakh.
Royalty (6 percent): 36,000.
Marketing (2 percent): 12,000.
Utilities and others: 50,000.

Monthly profit: 6 - 2.1 - 1 - 1 - 0.36 - 0.12 - 0.5 = about 92,000 rupees.

Payback: 40 lakh ÷ 92,000 ≈ 43 months, or about 3.6 years.

Sensitivity

If sales are 20 percent lower, profits can fall sharply, since many costs are fixed.

The slower month

When a new competitor opens nearby, sales drop to 5 lakh a month. With fixed rent and salaries, the outlet's profit shrinks to a fraction of the planned level.

Thinking a famous brand guarantees profits

Location, costs and sales volume determine outlet profits.

Key takeaways

Franchise investments include fees, fit-out and deposits.
Running costs include rent, staff, materials, royalties and marketing.
Payback periods of several years are common.
Fixed costs make profits sensitive to sales.