Before you buy any franchise, you need to understand one thing: does the math work?
That’s where “penciling the math” comes in.
This isn’t about building a perfect financial model with dozens of assumptions.
It’s about getting a clear, simple snapshot of the key numbers that drive profitability—and using that to decide whether the opportunity is worth deeper investigation.
At the core, there are three numbers you need to focus on:
#1 – Revenue
#2 – Fixed Expenses
#3 – Variable Expenses
1. Revenue
This is the most important number in the entire model—because every other number flows from it.
You’ll usually get revenue ranges from Item 19 of the Franchise Disclosure Document (FDD) section.
But those numbers alone aren’t gospel.
You need to validate them by talking to existing franchisees.
Ask them what they’re really doing in revenue, how long it took to get there, and what drove that growth.
When penciling, start with conservative revenue assumptions. Use averages, not top performers.
And if it’s a newer franchise without much data? Assume a slower ramp-up and bake in some cushion.
2. Fixed Expenses (The Bills You Pay No Matter What)
These don’t change based on how much you sell. Think of:
- Rent (if brick-and-mortar)
- Insurance
- Software subscriptions
- Equipment leases
Fixed expenses give you your monthly burn rate. It’s the minimum amount of money you need to bring in before you’re even thinking about profit.
3. Variable Expenses (The Costs That Scale With Sales)
These increase as your revenue increases. Examples include:
- Labor (techs, hourly staff)
- Cost of goods sold (COGS)
- Marketing (sometimes)
- Franchise royalties (usually a % of revenue)
You’ll want to understand your gross margin—what’s left after you subtract variable costs from revenue.
High gross margins mean you keep more of every dollar you earn.
Once you have a handle on variable costs, you can estimate how much revenue you need to cover both fixed and variable expenses—and then calculate when you hit breakeven and start making a profit.
The Bottom Line
Franchise success isn’t about guessing or hoping.
It’s about understanding economics.
Pencil out revenue, fixed costs, and variable costs.
Pressure tests your assumptions.
Validate with existing owners.
And don’t fall in love with the brand until the numbers make sense.