I've seen many press releases and articles lately about the huge success of the franchise model, some even citing statistics on specific franchises. Let's take a look at a couple.

Here's a recent release “Geeks On Call is one of the fastest growing and largest computer service organizations in the U.S. Last year, its 270 franchisees generated more than $25 million in total revenues. " Now I don't know what the royalty rate is for Geeks on Call, but let's say it's 6%. That means the franchisor is pulling in $1.5MM per year, and the average franchisee is grossing $87K per year. Here are some questions to ask: how many employees does each franchise have on average? How many cars that are burning up lots of gas and insurance, and need constant maintenance and repairs? What is the average cost of customer repairs? At this average volume, is the average franchisee making any profit? Wouldn't the franchisee geek be better off working for someone at $70K per year?

Or how about this one from a recent article in Entrepreneur Magazine about a woman who retired from a 30 year career in IT and bought a coffee franchise? Although the article made it sound like a spectacular success, the volume was cited at $330K for 2007. Let's do the franchise math: Royalties and Marketing at 8% = $26K, Food cost at 18% = $59K, Labor at 24% = $80K, Rent + CAM at $6K per month = $72K; Utilities at 4% = $13K, Insurance, local store marketing, permits, professional fees and other expenses at 4% = $13K. Net Income = $65K or around 20%. Not bad, you say? Let's next assume that she borrowed $200K for the buildout, and put in $100K for a net total investment of $300K. Her payments would amount to about $40K per year, reducing her cash flow to about $25K. All that for being on call or at the store 7 days per week. I'm sorry, but it doesn't sound like a great retirement to me. Plus, the MOST the business would be worth if she decided to sell would be 3 x $65K or about $200K.

When considering investing in a franchise, be sure to "do the math" before committing your time and resources.