Every bona fide franchisor in Australia gladly abides by the Franchising Code of Conduct - a lengthy document administered by the ACCC that protects the rights of you, our franchisees and the franchisor.
The short answer is that we are prohibited from answering questions on turnover and profitability directly until we have followed various requirements under the Franchising Code of Conduct.
We recommend you get very familiar with the terms "turnover" and "profit" and discuss them at length with your professional advisors. (Indeed, also get clear on "cashflow".)
The following represents the franchisor's experience and position regarding turnover and profit.
Turnover
Our first response to anyone who asks about turnover is always the same - to the owner of any business (whether franchise or not), turnover (by which we mean "sales") is merely a starting point number that really has no importance in its own right. What's really important to you, the business owner, is profit.
So why do people always ask about turnover?
It's difficult for most people to accurately assess the price to pay for a business. As a purchaser, you want to make sure you are not paying too much. And as a seller, you want to make sure you're getting a fair price.
Typically accountants and business brokers will try to find an easy way to establish the value (by which they mean "sales price") of a business. There could be a number of reasons for this including:
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to make it easier for their clients to understand a complex subject
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it may be a difficult or complex business to assess
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the cost of calculating a real value or price would be too expensive for a casual enquirer
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because they don't have a rigorous, logical or sound model to use for calculation
The most common method used to determine the selling price of a business is:
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to take a known figure about a business (turnover)
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possibly apply an arbitrary number to determine profit (in the absence of more rigorous financial scrutiny)
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apply an arbitrary average figure for either that industry or for all businesses in Australia, bearing in mind that thos ebusiensses may have nothing in common (often called a "multiple"). (Note: for many retail businesses in "good times", the "generally accepted" multiple is usually 3-4, and in "poor times" it can be as low as 1)
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state a sales price (which they state is the "value" of the business).
That common method is clearly a nonsense, is crude, and potentially over- or under-values the business to you or the vendor. But it's quick and easy and is used every day in Australia! It also completely ignores future potential of the business, risk/reward, and personal factors relevant to the purchaser.
Profit
A far more important question is about profit. In broad terms, profit is what you the business owner want to make to compensate you for your investment of money and time, and the added responsibility and risk of owning a busienss.
Of course profit is heavily determined by turnover (sales), as it is by Cost of Goods Sold (the cost of those sales), fixed costs (eg rent) and variable costs. But again, even that is misleading, as the stated profit of a business may not take into account your personal circumstances.
For example, consider 2 identical businesses with identical profit. One is purchased and paid for in cash, the other is purchased and paid 100% by loans. While profit before interest and taxes is identical ("EBIT"), profit after interest will be very different - and cashflow will be completely different again depending upon repayment of debt, distribution of profits, marginal tax rates etc.
For example, consider a business that is profitable but is 100% leveraged. That business may have to:
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pay debt from that profit
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pay tax from that profit, and
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repay debt principal ... irrespective of profit.
That may all result in negative cashflow, even though the business is highly profitable.
Comparing Turnover and Profits between stores
For the same reasons as above, comparisons and averages are not particularly meaningful. While we report to franchisees each month on store turnovers, this only provides a broad comparison. We know, for example, that once certain turnover levels have been reached, certain different or new circumstances will most likely occur in that store. For example, it would be likely that a certain staffing level would be required to service the number of customers once a certain turnover level is reached.
However we have stores that have lower profitability than other stores yet significantly higher turnover - perhaps because their rent is higher, or they choose not to work in the store as much and employ more staff, or their monthly interest bill is much higher and they locked in high interest rates … the list is endless.
Summary
As with most retail franchises in Australia, turnover is the basis of monthly royalty and combined marketing fund calculations to the Party Plus franchisor - it's a convenient way to share the load between differing stores having differing demographics, age of store, rents, staffing etc.
But to you the business owner, turnover doesn't tell you much that is meaningful. Even profit doesn't tell you a great deal until you apply your own personal circumstances (eg debt servicing, whether a store is run under management or by the owner etc).
With any business, the real test is “does the total financial and lifestyle package meet your expectations”?
Having said all of that, as you start to investigate Party Plus and we have spoken with you a couple of times, we fully disclose the range of financial performance experienced by our franchisees.
