Are you considering investing in a franchise but wondering how much money you can make as a franchise owner? The answer depends on various factors, including the brand, industry and market you choose. For instance, in a 2018 survey, Franchise Business Review reported that the median annual income for franchisees in the food and beverage industry is around $70,000. However, franchising is more than just french fries.
As of 2021, there are over 4,000 franchise brands across more than 90 industries in the United States and Canada combined. This means that there are abundant opportunities in the franchise world for you to achieve financial success. If done strategically and with the right resources, franchise ownership can certainly be worth the investment.
Is Owning a Franchise Worth the Investment?
While franchisors cannot guarantee a specific income amount, they are obligated to disclose your earning potential in Item 19 of the Franchise Disclosure Document (FDD).
Listen to Merri Cronk, a FranNet franchise consultant, explain franchise law and how you should use Item 19 and Item 20 of an FDD to help forcast a franchise’s earning potential.
Evaluate Item 19 of the Franchise Disclosure Document
The Franchise Disclosure Document (FDD) is a required legal document that provides essential information to help a potential franchisee make an informed decision.
Item 19 of the FDD is where a franchisor includes financial performance representations (FPR) for a prospective franchisee. It’s important to note that a franchisor is not required to include FPRs if they are not discussed in the sale of the franchise. While the FPRs are not meant to guarantee future income, they can provide insight on the sales, income, or profits of a particular franchise. Keep in mind that the information under Item 19 of the FDD might not give the full financial picture, so this can’t be the only thing you consider when deciding which franchise to pursue.
Listen to what Jania Bailey, CEO of FranNet and former banker, has to say about the importance of Item 19 in the decision-making process.
Factors That Will Impact Your Bottom Line as a Franchise Owner
As mentioned already, you should consider all of the variables if you want to become a successful franchise owner. Here are several factors that can impact your earnings.
- Personal goals – It may seem unrelated, but the first step in determining your potential profit is considering the type of lifestyle you want. For example, if your goal is to focus on executive-level tasks while hiring a manager to run day-to-day operations, you may experience less profit. On the flip-side, if the business model allows you to do much of the work yourself – and you’re willing to do it or have family members that can contribute – you can earn a higher profit.
- Revenue potential – Revenue potential depends largely on the brand and industry you choose to invest in. For example, franchises in the food industry tend to be more profitable than franchises in the retail industry. Ultimately, you want to find a franchise that has the potential to bring in a large amount of cash, whether that be via a high customer volume or a high-ticket service.
- Start-up costs – Failing to properly account for how much money it will take to start the franchise can significantly impact your bottom line. These costs include: franchise fees & royalties, on-hand liquid cash, remodeling costs, business insurance, inventory, equipment, real estate, and more.
- Operation costs – These are the ongoing expenses that will impact your franchise’s net income. These include: replenishing supplies, local advertising, staffing needs, franchise royalties, financing payments, insurance premiums, taxes, and more.
- Multi-unit ownership – If a franchisee operates the franchise in more than one location, not only is there more potential for revenue since there are multiple streams of income, but it can lead to reduced costs overall as resources and expenses can be shared between locations.
- Location – A critical factor in business profit is location and local market factors. For example, a franchise located in a new development and in a high-growth area will likely succeed more than a business in an oversaturated area. Additionally, if you are located in a small town, your profitability is going to be limited compared to a thriving metropolitan area. Demographics also matter. If you buy a franchise that provides services or products for higher-income individuals, but your business is located in a low-income area, there might not be enough traffic to provide high volume and profits. The key is to perform market research upfront to maximize your success.
- Franchisor support – Another important factor is determining how much marketing support the franchisor will provide and how much you will need to do on your own. Does the franchisor have proven systems for attracting business? How much flexibility will you have to cater to your local market? If the franchisor has rules that prevent you from adapting to the needs of your local market, it might hurt your ability to be profitable.
- Personal success – Perhaps the biggest factor that will determine your success as a franchise owner is your ability to pick the right franchise and your personal performance as a business owner. You must do your research and choose a franchise with a proven track record of success. You should also seek advice from current franchise owners whose businesses are already succeeding. Many owners will be happy to help you understand the financial performance of their business, and they likely asked the same questions before they became franchisees. Additionally, it is essential that you follow the franchisor’s business model and use its proven systems and processes to maximize your earnings. For further reading, take a look at 10 Important Steps to Opening a Franchise.
Consider the 80/20 Rule
Oftentimes, it’s the top-performing franchise owners that encourage thousands of people each year to invest in a franchise. However, these top performers make up about 20% of franchise owners, while the other 80% make more modest incomes. Also, while average income data might be interesting to look at, the numbers include all franchises, which means that the top-performing franchise numbers inflate the income data.
After deciding which franchises you want to pursue, you will have the option to speak to other franchisees in that organization for more insight, which will help you get a more accurate idea of gross and net revenue potential. A FranNet franchise consultant will advise you along the way. Schedule your free consultation to get started!
Understand How a Franchise Owner Gets Paid
When looking at potential revenue numbers for a given franchise, it’s easy to get ahead of yourself and start imagining what your personal income will look like. When doing so, it’s important to note the difference between “business profits” and “owner’s income”. No, a business owner does not get to keep 100% of their business’s profits. Before you “pay yourself” from the profits, you must cover all overhead expenses (rent, payroll, inventory, insurance, investments, etc.).
It’s true that a business can be quite profitable while the owner’s take-home pay remains low. However, if the franchise continues to succeed over time, then you can expect your income to rise as well. If you want to have a good idea of how much you might earn, then, again, you should go straight to the source and talk to franchise owners that are already succeeding.
Is Franchising For You?
You must do your research and set accurate expectations, but owning a franchise has significant potential. Starting up a franchise requires a thought-out plan, an investment of time and money, and a willingness to be patient. However, if done right, owning a franchise can be the most rewarding investment you’ve ever made.
Interested in getting started? Speaking with a FranNet franchise consultant is the first step. We will help you understand your options for franchise ownership and walk you through the process from start to finish. Schedule a free consultation today!