Franchisee Break Even Analysis

by Ed Teixeira

Break -even is that point where sales volume generates gross margin dollars sufficient to cover the operating costs of the franchise. A lower sales volume would be unprofitable and a higher volume would be profitable. Break-even analysis focuses on the relationship between fixed costs, variable costs and sales. Anyone looking to purchasing a franchise should do a simple break-even analysis once they have gathered and compiled the necessary information.

There are sophisticated forms of break even analysis that calculate the unit costs and sales per unit necessary to cover costs. A food franchise with ingredient, preparation costs and a number of menu items might want to use the more complex version. For our purposes we’ll use a less complicated format. The text below explains the information you need to do the calculation. We've also provided an online break even calculator for franchisees to help you quickly do the math.

In order to identify the break -even point, costs need to be broken down into the following categories:

Fixed Costs

Fixed costs are costs that do not change when sales increase or decrease. Examples of fixed costs are rent, property taxes, utility costs, insurance, interest expense, telephone, most professional fees and a significant portion of payroll costs. Technically, a break-even analysis defines fixed costs as costs that would continue even if you stopped generating sales. I would suggest that you use projected fixed costs, including payroll and normal operating costs. This will give you a better insight on financial realities. If averaging and estimating is difficult, use your Profit and Loss projection to calculate a working fixed cost estimate—it will be a rough estimate, but it will provide a useful input for a conservative Break-even Analysis.

Variable Costs

Variable costs are costs that are initially fixed but will increase with added sales. The best example of a semi-variable expense is payroll. Every business requires a minimum number of employees to operate the business. As sales increase to a certain point additional employees must be added. A good example would be a food franchise. As more customers frequent the location additional employees are needed to service these customers. There are some franchises that can process added business without having to add staff. Other semi-variable costs would be  such as  postage and certain supplies.  However, in our calculator,  the only variable cost we’ll use will be royalty and advertising fees since these costs are based upon a per-cent of sales.

Break Even Point

The calculation is simply total costs divided by gross margin percent equals the sales necessary to reach break-even. The important details are identifying a gross margin percent and total costs.

Click here to launch the franchisee break even calculator and calculate your break even point.

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Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at franchiseknowhow@gmail.com