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Profit and loss in franchising

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I am currently looking at a franchise here in Toowoomba. It is an existing business with a regular client base with a claimed weekly gross. I need some advice please about the franchisee supplying profit loss statements for my own information and for my bank to be able to borrow the money or does it work differently to this. 

The vendor of the franchise should be able to supply you with the profit and loss statements for the last couple of years so you can verify the top line sales but more importantly the profitability of the business.

You need to be able to verify profitability to get comfort that you can make money. Your bank will require that information also as a matter of course.

There could be a couple of reasons why the selling franchisee does not want to supply the information and these could be;

  • the business is making a loss and hence has no value
  • he simply has not been completing a P&L and as such is not paying tax or BAS (unlikely especially when he wants to sell the business)
  • runs another business through the company name and has been unable to split the expenses (again unlikely as it should not be too hard to differentiate the expenses for each business)

A suggestion would be to approach the franchisor, ask if it is a pre-requisite that a franchisee supplies P&Ls to them. Some franchises it is mandatory others not. If it is not a pre-requisite ask if they have some average bench marks for the expenses in running the business. If they do you could build a P&L from the gross sales you have, if they do not it is time to go back to the franchisee selling. If he is still unable to supply a P&L be wary of the business and ask how he came up with the sales price (usually a multiple of EBITDA for franchises).

At the end of the day it may be a very profitable business but if you cannot substantiate it you will need to do detailed due diligence. Ask other franchisees if they can supply some expense ratios, again from that you may be able to construct a P&L based on the top line sales.