FRANCHISE REVIEWS »

Independent franchisee satisfaction reviews of today's top franchise opportunities

ADVERTISEMENTS



FBR FEATURES »

SECTOR REPORT | April 17, 2013

Top Franchises 2013

The 2013 Guide to Today’s Top Franchises takes a close look at the data compiled as part of Franchise Business Review's annual franchisee satisfaction awards. We explore what trends we're seeing in 2013, what concepts and franchise models are most popular, what’s involved from an investment and financing standpoint, and how franchisee satisfaction has fared in the past year.
more >   comment

NEWS | April 16, 2013

First Non-Medical In-Home Care Franchise System to Launch Telehealth Monitoring

FirstLight HomeCare now offering telehealth technology to expand services for clients, families and to further enhance industry-leading Readmission Rescue Program.
more >   comment

ARTICLE | April 15, 2013

On the Job with Terry May

May’s first paying job was at age 16, in the small garage in Roberts, Wisconsin. Then he honed his skills as a jet engine mechanic in the U.S. Air Force for four years. When he came out of the military, he went back into automotive repair. After 40 years in the business, May said he has no intention of slowing down. He is now shop foreman for Honest-1 Auto Care in Cottage Grove.
more >   comment

ASK FBR | March 25, 2013

Where are you in your franchise search?

Franchise Business Review wants to know what stage you're at in finding the right franchise for you: still in the research phase, having conversations, opening your first location soon... FBR encourages you, no matter the stage, to answer this simple question - where are you in your franchise search? (Click here to share)
more >   comment
Home > Blogs

What's the Profit? "Owner's Discretionary Income"

by Steve Tanner

Everyone wants to know the same thing when analyzing a business – what’s the profit?

Franchise candidates want to know the company’s earning potential. They should (and often do) ask existing franchisees how much money they’re making and what the financial viability of the system is.

Franchise owners want to know how much value they’re deriving from the business.

Franchisors and their field support staff want to know the operational efficiency of their franchisees.

The problem is that determining “profit” isn’t as simple as looking at the bottom line of a P&L – especially when analyzing a company like TGA Premier Junior Golf that is usually home-based with a single owner/operator. That’s because the P&L often includes a variety of benefits to the owner that are entered as expenses, such as an owner’s salary/draw, entertainment, etc.

At a recent conference, I learned of a financial calculation from a fellow franchisor that solves this problem. It’s called “Owner’s Discretionary Income.” Here’s the equation:

company profit (the Net Income line of your P&L)
+ owner’s salary (including draw, dividends, etc.)
+ fringe benefits (things you’d likely pay for out of your own paycheck if not a business owner)
= Owner’s Discretionary Income

This calculation tells you exactly how much value a business is delivering to its owner. It also tells you how well the business is functioning from an operational standpoint. That, in my opinion, makes it extremely relevant and important for franchise candidates, business owners and franchisors alike.

Steve Tanner
COO, Author of GolfEntrepreneur.com
TGA Premier Junior Golf

Learn more about TGA Premer Junior Golf at topfranchises.franchisebusinessreview.com.

 

You must register to post a comment. Registration is quick & easy. If you are already an FBR member, click here.
First Name:
Last Name:
Email:
Password:
Confirm Password:
Receive updates, notifications and special offers from Franchise Business Review
 
Comment:
Verification: CAPTCHA Image
[ New Image ]
Posted by Eric Stites on 09:04:07 AM on November 4, 2011

Great post, Steve! You make a fantastic point. Every person I talk to that is interested in investing in a franchise business asks the profit question... and they should. But as you point out, there are often many fringe benefits that small business owners are taking out of their business, that don't get reported as profit. I like to call these things "owner benefits" and they can include things like health insurance, life insurance, retirement plans, cars, cell phones, computers and other equipment, travel and entertainment expenses, etc. A small business owner can easily receive $50,000 or more in owner benefits that don't get reported as income or profit. Your formula for Owner Discretionary Income is right on, and it's important for all franchisee candidates to consider these owner benefits when researching any franchise opportunity. Thanks for sharing! Eric Stites President and CEO Franchise Business Review