Thousands of entrepreneurs take the plunge and invest in franchises as a way to grab onto the American dream. The lure is having a proven brand concept and training and marketing support to improve the odds of start-up success. But for most, the No. As part of the just-launched » America’s Star Franchisees » list, the 50 franchisees profiled across the country provided franchiise gross sales figures, many running into the millions francihse dollars. But as part of its work on the project with CNBC, Franchise Business Review also reviewed profit figures for the vast majority of «Star Franchises» and found that these franchises as a group average three times the net income of the average U. For some, the advantage was starting with a low-cost franchise and hitting the ball out of the park. Others were able to generate a high return on investment, even at a greater initial franchiae investment. And remember, the franchisees on this list are rock stars, not the average.
The 80/20 Rule
Making money from a franchise system is significantly different from doing so with other kinds of business. The franchisor does not earn income solely from goods or services sold by the company-owned businesses alone, but also from franchise fees and royalties from the franchises they sell to franchisees. The different financial demands and nuances of franchise systems hence require a different approach than one might take if running a traditional business offering. In this article, several aspects to generating revenue from a franchise system will be discussed and guidelines suggested for franchisors, based on advice from the franchising book Grow Smart, Risk Less by Shelly Sun. Many people who are new to the franchisor side of the franchise industry, or who are considering becoming a franchisor, might assume that the primary source of income from a franchise system comes in the form of franchise fees, i. However, many franchisors report that, contrary to this assumption, their primary source of income is rather from royalties; that is, the ongoing fees that franchisees pay to the franchisor on a regular basis, which may either be a flat rate or a percentage of turnover or profit. The actual selling of a franchise itself tends to be a loss-leader for most franchisors: the franchisor makes a short-term loss on selling a franchise business in hopes of making a long-term profit from the franchisee via royalties. Although this figure will vary substantially depending on the industry, the sector, the size of the franchise system, the market penetration of the franchisor and countless other factors, many franchisors report that it takes anywhere from 18 to 22 months to break even on a new franchise business. Obviously, the franchisor wants this figure to be as low as possible, which is why proper screening and selection of new franchisees is so important; a beginning franchisor, anxious to spread their franchise system, may accept offers from a wide range of prospective franchisees with the required capital, but this may result in long-term losses if the prospective franchisee is not qualified to run a franchise business. For any franchise system in any industry, this is what all franchisors should be striving towards at all times. Below are five key strategies to maximise royalties from franchisees, which shall be discussed in greater detail below:. For further information on how to ensure your new franchisees have as strong a start as possible, consult our article on training and on-boarding procedures for franchisees. Your goal should be to maximise franchisee unit economics, shorten the time it takes for the franchisee to break even, and minimise the time that a franchise is open without trading — every minute the franchise is open without trading is costing you money. Before signing any franchisees, you should set aside additional resources for several useful purposes:. Above all, you should secure agreement by the franchisee to participate and comply with your standards and procedures before they sign the franchise agreement. Franchisee accountability is key to ensuring the franchise is successful in the long run — the franchisee should understand in advance that they will be held accountable for both successes and failures in the running of the franchise. However, it is generally better for the franchisor to hold these difficult conversations as soon as it comes to their attention that the franchisee is having problems, as it generally serves the interests of both the franchisor and the franchisee. You can identify the issues in how the franchise is being run to the franchisee proactively, while the franchisee may themselves be looking to have this conversation with you but is unsure how to raise the issue. It is always best practice for you to raise the issue with the franchisee yourself, rather than waiting for the franchisee to come to you.
The 80/20 Rule
This story appears in the January issue of. OK, so you think you’re ready to buy a franchise. You’ve done some research. You’ve weighed the pros and cons. You’ve selected a business with an interesting product. You even know what you’ll wear to work and how many hours you expect to be there. Yet in spite of how much preparation you’ve done, you still don’t know the answer to the most pressing question: Will your business make money? No franchise company—no matter how glorious its track record—can guarantee financial success. But you have a much better chance of having a winning proposition if you follow these practical pointers before you sign on the dotted line. Know thyself. Choose a business in which you really believe you can excel—a business that matches your singular set of skills and interests as closely as possible. Assess your strengths, weaknesses and blind spots. Visit existing units of the franchises you’ve targeted and talk to the franchisees. Are they like you? Are they more driven or far more laid-back? Volunteer to work in a franchise for a few days, then decide if you’re truly passionate enough to own one. As Houston franchise attorney Richard Solomon puts it: «If you just like soup, buy a bowl of soup. Don’t buy a franchise that serves it. Avoid fads. Is the sector you’ve chosen hot or just overheated?
Feeling the Burn
This story appears in the September issue of. Franchisors are pretty upfront about what it’s going to cost to get you into their systems. They happily outline franchise fees, royalties, marketing requirements and grand-opening costs, and they can ballpark figures for potential franchisees on everything from the amount of printer paper they’ll go through each month to the best deals on neon signs. But franchisors are bashful when it comes to talking about how much moolah franchisees can actually earn running their businesses. This reluctance makes sense to a certain extent. Instead, franchisors direct candidates to their Franchise Disclosure Document FDD , the detailed prospectus they are required by law to give to interested investors. Item 19 of the FDD details the financial performance of the franchise and offers a snapshot of the average revenue a franchisee makes. But Item 19 is often calculated with a sleight of hand that would make a magician proud, with the numbers spun to put the system in the best possible light. The earning ranges documented can be so large e. So, how much can you earn by opening a franchise unit? Beyond that, it’s hard to generalize, since there can be major differences between concepts even in the same sector. We spoke with experts, franchisors and franchisees in restaurants, mobile opportunities and personal-service companies to estimate the profits one might expect when investing in different types of businesses. More important, we picked their brains to discover the moves smart franchisees make to increase their margins. When people think of franchising, fast food is often the first thing that comes to mind. While restaurants make up a healthy chunk of the franchising world, it’s hard to recommend a food-based franchise to beginners. Typically, restaurants have some of the highest startup costs in franchising. At the same time, they offer the biggest returns. He believes that to make a go of it in the food business, operators must be extremely smart right out of the gate. You have tiny margins and can’t afford to make mistakes. According to a report on food franchising by Franchise Business Review, That doesn’t sound too bad, until you factor in the initial investment. There’s no question, however, that a well-operated restaurant can be a cash cow, even with the higher overhead expenses. In , when Dean Clarino bought his first Teriyaki Madness location in Las Vegas, he didn’t have any food-service experience. But he was passionate about making the store work. He blanketed the surrounding area with advertising , and each week he invited a local business to come in for a free lunch. His enthusiasm paid off, and he watched customer counts and revenues grow steadily. When he was ready to open a second location in the endcap of a suburban strip mall, he knew that keeping his rent reasonable was key. In fact, he says he walked away from negotiations with the landlord six times before signing a lease on 2, square feet of space. After securing the lease, the first thing Clarino did was install signs outside of his restaurant facing in all directions; for 72 days during construction, the lunchtime crowd saw his signs from the windows of other restaurants.
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Potential franchise owners research different franchisors to learn how much mohey they can make before they purchase a franchise. When they approach a franchisor to learn more about it, they may find that this topic is difficult for franchisors to respond to. For a owjers of reasons, they cannot tell a possible future franchise owner how much they can make. It is difficult to get a straight answer from franchisors about the potential for making money from one of their franchises. This is because some of them do not publish information that can help you determine the income range to expect. Inthe United States passed legislation giving authority to regulate the franchise industry to the Federal Trade Commission. The FTC has since stated that only certain kinds of information about sales and other income can be presented to potential franchise owners. The legislation was passed to prevent the misleading advertising franchisors had been promoting in the past. In Item 19 of the Franchise Disclosure Statement, franchisors can publish certain kinds of information about sales and income to potential franchise owners.
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