When you’re gearing up to buy your first or next franchise, chances are you’re doing your due diligence. You research the franchise’s reputation. You talk to other franchisees. As you look at the financial side of the franchise, you look at key metrics to figure out how profitable you could be when becoming a franchisee with a particular organization.
Those key metrics that you look at matter. They paint a picture of what’s happening in the organization, where the franchise is going, and what you can expect when you sign on the dotted line to become a franchisee. However, many people don’t know which metrics to ask to see and where to look for a realistic picture of what to expect when starting the franchise. To help you uncover what’s happening under the franchise’s hood, here are five key metrics to look for when doing your due diligence.
1. Gross Sales
Gross sales look at the total number of transactions made during a specified time. This figure accounts for how much money the store brought in total.
Gross Sales = Sum of All Sales Receipts
While it might seem like an obvious metric, many people overlook it in their research. This metric reflects the total amount of revenue you can expect to get each month inside your franchise. It also indicates customer buying habits and how much money people spend. Looking at the trend of gross sales over time lets you see patterns in consumer spending within specific industries to help you know what you can expect regarding cash flow.
2. Growth Rate
Growth rate shows you how much the franchise is growing over time or if you’re signing up to be part of a sinking ship.
Growth Rate (Revenue) = [Revenue (Today) – Revenue (Last Month)] / Revenue (Last Month)
This metric shows how much revenues and earnings have changed over time. It is essential to look for patterns in whether there is growth. Likewise, spotting growth trends, such as seasonality in the franchise, can help you better understand when you can expect higher sales and how soon you’ll be profitable.
3. Average Sales Per Customer
It’s not enough to look at overall sales. You must also look at the average order's revenue so you can determine the foot traffic and volume you’ll need to be successful in your area.
Average Sales Ticket = Total sales / Number of customers
The average sales per customer let you know what kind of sales activity you’ll need to generate and how quickly you’ll need to attract customers to reach your sales goals. The average sales per customer also helps you know how consumer behavior works. Are you going to need to upsell to make more money? Is it easy to cross-sell to increase profitability? These and other questions can be answered by analyzing the average sales per customer.
4. Net Promoter Score
Net Promoter Score is a unique but important metric that quantifies how likely someone is to recommend a store to a friend.
Promoters = Respondents giving a 9 or 10 score
Passives = Respondents giving a 7 or 8 score
Detractors = Respondents giving a 0 to 6 score
This metric is calculated by asking customers to rate their likelihood of recommending the franchise to a friend on a scale from one to ten. The franchise has a good reputation if the person says a 9 or 10. If it’s 7 or 8, then there’s not a high chance that the store will be widely recommended. Anything below 6 is problematic for the franchise.
Look for franchises with a higher NPS to boost the chances that others will recommend your business soon after you open your franchise doors. This is how you build word-of-mouth marketing and drive traffic quickly into your franchise, so knowing the NPS for a franchise is important.
5. Net Profit
The fifth metric you’ll want to look at is Net Profit. Net Profit shows your franchise's profitability after costs, taxes, and depreciation.
Net Profit = Total revenue – Total expenses
Unlike gross sales, net profit considers all expenses. When investing in a franchise, you’ll have higher expenses upfront. Understanding the Net Profit for the franchise you’ve selected will help you better predict what to expect after the initial investment stages. It also lets you know what expenses you’ll be investing in each month so you can better understand your cash flow.
Looking over key metrics is a vital part of any franchising journey. Using these metrics when choosing a franchise can help you get a better understanding of what to expect when you open your franchise doors.
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Kimberly Crossland is the founder of Roadpreneur and Cruisin' + Campfires, two companies designed to keep families together and living in freedom through travel and entrepreneurship. The goal of both businesses is to inspire meaningful change through the power of a strategic, thoughtful approach to life and business. In her free time, you can find her looking for a new adventure together with her two boys.