When people explore franchising, many focus on revenue potential—but seasoned franchise owners and consultants know the truth: revenue is vanity, profit is sanity.
This stage of investigation isn’t about dreams—it’s about discipline. It’s where you trade excitement for evidence and feelings for financial facts. The most successful franchise owners don’t ask, “How much can this business make?” They ask:
“How does this business make money—and how much is left after everyone else gets paid?”
We often tell candidates:
“The franchise fee buys you the system—but your profit is earned by your decisions.”
Step 1: Understand the True Total Investment (Not Just the Franchise Fee)
Many candidates underestimate the real cost of entry. Advertisements will only give the franchise fee, neglecting the rest of the true startup costs. The FDD provides an investment range, but financial due diligence requires clarity around what makes the difference in these ranges, such as working capital, marketing reserves, payroll, and cash cushion.
Key Components of Total Investment:
- Initial Franchise Fee
- Build-Out and/or Equipment (if applicable)
- Grand Opening Marketing
- Insurance, Licenses, Legal Fees
- Payroll before breakeven
- 12 Months of Working Capital (this is where most buyers under-prepare)
Remember: The goal isn’t to just open the doors—it’s to fund the business until it can fund itself. Franchises help you ramp up fast and that will take capital to do so.
Under-capitalization is why good people fail. A strong model still needs financial oxygen to breathe.
Step 2: Break Down Unit-Level Economics — Where Profit Is Made (and Lost)
Franchises share templates, but numbers live in reality. That’s why you must analyze the financial numbers and talk to the reality- the franchisees.
Core Metrics to Review During Validation with Franchisees:
- Average Unit Volume (AUV) – What are typical and top-performing stores doing?
- Gross Margin – After cost of goods or cost of services, what’s left? Get this in %s.
- Fixed Costs – Rent, payroll, royalties, tech fees, marketing fund, etc
- Breakeven Point – How many customers or contracts are needed each month to cover costs?
A successful franchise doesn’t just earn revenue—it generates scalable cash flow with predictable margins.
Step 3: Item 19 — Use It, But It’s Not The End of The Story
Item 19 is often the most-read page of the FDD, and the most misunderstood. Some franchisors include detailed P&Ls; others show only top-line revenue. But even the best Item 19 is not a promise—it’s a pattern. This is ultimately what we are looking for- patterns.
Use Item 19 as your blueprint—then go to validation calls to get the real story.
Ask Current Franchisees:
- “What was your real first 12-month revenue?”
- “What are your margins today?”
- “How long did it take you to get to a break-even month?”
- “How long until you had consistent break-even months?”
- “How long before you paid yourself consistently?”
- “What surprised you financially?”
Success leaves clues , so follow the patterns, not the promises or hype.
Step 4: Time to Profit — The Most Ignored Number in Franchising
Everyone asks, “What will I make?”
But the better question is, “When will I make it?”
Your runway matters more than your destination. If this is a business that takes 6–12 months to hit breakeven, do you have the cash, patience, and support to pay your bills the first year or through this period?
Three Financial Phases of Every Franchise:
- Investment Phase – Cash out, no return yet.
- Stability Phase – Breakeven and reinvestment.
- Profit Phase – Predictable income and scaling potential.
The winners in franchising are not the fastest—they’re the best-prepared. Be sure you understand these phases and the actions it will take to get there. A franchise gives you the roadmap and the systems to ramp up faster. But be sure you understand the timeline. You still will have to put in the work to get there. The bridge between vision and victory is consistency.
Step 5: Red Flags and Risk Indicators to Watch
Not every franchise is created equal. Even a strong brand can carry risk based on financial structure.
Red Flags to Look For:
- High franchise transfers in Item 20 (owners leaving early)
- Revenue without margin (high sales, low take-home)
- Overreliance on one marketing channel
- Lawsuits involving franchisee profitability
Green Flags of a Healthy Franchise Model:
✔️ Multiple franchisees opening second or third locations
✔️ Owners paying themselves by Year 1–2
✔️ Clear unit-level financial coaching from franchisor
Look for patterns of success, not perfection. Success really does leave clues!! If you hear the same wins—and the same struggles—across owners, you’re looking at truth.
Step 6: Ask the “Profit to Owner” Question
This is where fantasy becomes reality. You’re not buying a business—you’re buying a paycheck.
Ask every franchisee:
- “After expenses, what percentage is net profit for you?”
- “If you were me, how much money should I expect to pay myself in Year 1? Year 3?”
- “How many units will I need to pay myself X amount?”
A strong service franchise might net 15–30% profit. A retail model may net 15–20%. But remember:
It’s not what the business makes; it’s what the owner keeps or the bottom line.
Mindset During Financial Due Diligence: Patient, Proactive, Prepared
This phase requires courage over confirmation bias. You will hear things that challenge your assumptions. That is good. Keep asking questions to get your answers to make an informed decision. The more you know, the better prepared you are.
If you’re afraid of numbers, you’re not ready to own the business. Numbers don’t judge you—they guide you.
All businesses generate data that you should measure. You can’t manage what you don’t measure. (Numbers of leads, booked appointments, estimates sent, customer count, average ticket, weekly, monthly, quarterly, yearly, etc..)
You should be mindful of financial decisions but not fearful or paralyzed by them. Numbers tell a story and can give you expectations. If things look good, you have to decide if you have the mindset to get started on your business journey. (That’s for another article on business mindset.)
Final Thought: Profit Is Not the Only End Goal — Freedom Is
Financial due diligence isn’t about money—it’s about making sure your business funds your life, not the other way around. Yes, you want a profitable business, but ultimately you want a business model, that gives you the dream you have been looking for. Everyone’s goals are different and finding the right model with the right predictable profitability is key.
You’re not buying potential. You’re building predictable freedom.
Financial clarity doesn’t kill your dream—it protects it.
Ready To Explore Franchising? Let’s Talk!
Mack and Sharon Strange are on a mission as Franchise Consultants to help others go from “Start” to “Success” when it comes to franchise ownership.
If you’re curious about exploring franchising as a career pivot, investment vehicle or lucrative side hustle, let’s talk!
Frequently asked questions (FAQs)
Q: How do I book a call?
A: You can book a free, no obligation call with Mack here and/or a free call with Sharon here.
Q: How much do your services cost?
A: As Franchise Consultants, there’s no fee for our services. We’re compensated by franchisors only if and when you decide to move forward with (and are approved for) franchise ownership.
Q: What do you do?
A: Our role is to serve as a trusted guide and educational resource.
Q: Where can I learn more?
A: You can learn more about our story and how YOU can follow in our footsteps via the Franchise Together Podcast.
We look forward to connecting with you soon!
