Business Plan Tutorial Preface & Credits

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ANALYSIS OF “Sample Established Company” [1-2 Years Old]

WHAT HAPPENS WHEN SALES ARE HIGHER? To survive the start-up years, the franchise operator must continue to put money into the system, while still building sales. It is a matter of survival. If he/she succeeds, and achieves reasonably strong sales, there will be money to take home, but the picture is not too encouraging…

(See below box to reach the next four exhibits, E, F, G, and H, for our tutorial. Print them now, you’re almost there!)

Part 4: Higher Revenues

New Assumptions

  • Direct labor (total personnel) has been adjusted upward, reflecting greater labor needs to maintain the higher sales volume.
  • Variable expenses such as utilities, administrative and clerical expenses, supplies, phone and mail expenses have also been raised.
  • In addition, $100 per month has been added for professional fees.
  • Material costs have been reduced from 22% to 19% to allow for higher volume purchase discounts and enhanced vendor relationships for materials that must be purchased.


In expense assumptions shown in Exhibits G and H, a number of other variables have been adjusted in both the franchise and non – franchise scenarios to reflect changes that can occur over time in real-life operations (see box above.) To see how royalties and ad fees impact on a higher grossing business, look now at Exhibits E and F. Here the figures reveal a more mature operation, which is now averaging approximately $25,683 in monthly sales. Apart from these adjustments, we have applied the same Franchise Factor to this example: An 8% variable selling expense is added in Exhibit E to reflect the 6% royalty plus the 2% advertising fee. In the non – franchise example shown in Exhibit F, this charge is not included, but a fixed expense of $500 per month has been added to allow for advertising and brochures.

Furthermore, to keep these models as realistic as possible, a nominal $100 per month is allocated in the franchise example as a fixed expense item for advertising and brochures. This is because every franchisee needs to spend something for local advertising — even it if is just photocopies of flyers for a chamber of commerce meeting or for thank you cards for clients!

The Bottom Line

Looking now at Exhibits E and F, we look again at the bottom line. Here we see “Net Income Before Taxes” circled. The end result reveals that on gross sales of $154,000 (or $308,000 per annum), the franchise has a net income of $15,800. The non-franchise operation nets $26,100 before taxes.The difference between $15,800 and $26,100 is $10,300. This is the additional cost to operate a franchise version of our sample company for six months. A franchisee is required to pay 8% of the gross sales, or $24,640 this year in our model, to the franchisor in order to operate the franchise for twelve months.

40% of the Net Income

The Franchise Burden

Adjusting for the non-franchise business’s investment in advertising, this is still $20,600 more per year the franchisee must pay, on top of the initial purchase price of the franchise. That sum increases if gross sales increase over the years.

The sum of $20,600 is a whopping 40% of the net income of the business! Multiply by 20 or 30 years (the length of most franchise contracts) and you have your total cost to “purchase” the business!