In a previous post I referred to the ideal conditions of a franchisee. Unfortunately, only under these conditions, success cannot be achieved. Also, you need money.

Few franchisors tell their potential franchisees that the first months of operation, I would say, the first year, is going to be very stormy when it comes to the finances of the franchise business. Instead, they show technical sheets with "ranges" of investment in various items, saying that the investment will depend "on the size of the premises".

It’s important to be clear about this: during the first year of operation, the franchisee will not only not be able to withdraw money from his/her franchise, but he/she will also have to put money into the franchise.

And of course, you'll have to go on with your daily life, that is to say, you have to go to the supermarket, pay the rent, pay the school, and pay all your expenses, the same as you had before buying the franchise.

This can only be achieved if, in addition to considering all the money needed to pay the initial fee, equipping the franchise with furniture, hardware, machines, electricity, etc., decorating it with all the elements that characterize the brand, holding the Grand Opening and buy the initial amount of goods if applicable, you will have to have an "extracash" to operate smoothly during the first year, and also, you will need the necessary money to pay all your expenses, the same as you had before buying the franchise, until the franchise begins to pay off.

No franchise gives money in the first month. And when the franchisor announces that the investment recovers in 12 months, it would be necessary to watch carefully what formula is he considering, and the values he uses to calculate the size of this tremendous success ...

While the personal expenses of the franchisee will remain incognito due to due respect for his/her privacy, the expenses that we call "extracash" can be calculated in a very precise way, if the franchisor was required to measure certain factors at the start of the operations of his previous franchises and/or own businesses.

How is the "extracash" calculated?

In the Excel business model that is prepared to simulate the operation of a franchise module, it is necessary to enable a new sheet called "learning curve". In this sheet, the quantities of each of the products that the franchise will sell month by month during the first year must be dumped, which must have been measured and averaged by the franchisor in previous operations (although there are not two equal franchises, it is better to have an average of what happened in previous franchises than to put the data in the Excel by the rule of thumb method).

In this way, we will have the revenues month by month during the first year.

To that we must subtract month by month:

• The cost of the goods sold in that month
• variable expenses such as royalties, expenses for selling with a credit card and the like
• fixed expenses
• salaries
• investment in marketing by the franchisee
• taxes (social security, unions, tax income, and some other delicacy).

The result will be negative month by month for several months, hopefully they will be few.

The sum of the absolute values of these negative results will give the "extracash" that the franchisee must have available so that the franchise works well during the first year, all obligations can be paid, there are no rejected checks and we can face happily the following years of contract, in which it is supposed that there will be money to start withdrawing.

But the franchisee must remember that this is only part of the amount of extra money he/she needs when buying the franchise, and that he/she will also have to continue living and facing his/her personal expenses throughout this period.

Some will argue whether this "extracash" should be considered as an initial investment or not, to calculate the corresponding return. The truth is that for me that is irrelevant. The important thing is that this money must be alive in our pockets, because if not, many "stakeholders" (mainly employees) will be affected.

And nobody wants that.

It is very important that franchisors include this calculation in their models when they publish the famous technical sheets and NDAs, and that they make their best efforts to give the franchisee an idea of what is going to happen from the beginning. Putting "ranges" of investment variation does not solve any problem of operation of the franchise, although of course, the franchisor is calmer saying "I told you that the investment could vary".

This reaffirms once more what I never tire of repeating: if you are going to buy a franchise, you have to be in love with the brand and the project, you have to have a medium and long-term vision, you have to feel that you are adding value to your territorial community, that you are giving skilled and valuable employment, and that you enjoy your work attending to your neighbors in your territory. If you buy a franchise just because they told you it was a good deal, you're going to have complications from the start.

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