If you’re thinking about buying a franchise, one of the first questions on your mind is most likely how much profit you can make. While a Franchise Business Review study revealed that the average franchisee earns a profit of $66,000 annually, that number varies greatly (from $50,000 to $500,000) and many factors impact those numbers.
So, with this great variation, how can you really know how much money you can make? The answer to this question isn’t simple, but there are a number of factors that you can carefully consider to get a better idea.
Factors That Affect Franchise Profit
Your Lifestyle
It may seem unrelated, but the first step in determining your potential profit is considering the type of lifestyle you want. That question will help you determine the type of franchise that will be a good fit for you, which will determine the money and profits you can make – to an extent.
For example, if you’re 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.
The Type of Franchise
Most franchisors will gladly explain the costs to get started, but due to legal concerns, they have to be very careful about promising specifics when it comes to potential profits. However, if you’re buying an already-existing business, you should have access to the previous year’s financials that will show a profit/loss statement. (Sometimes these numbers can be a bit overinflated due to the intense efforts put in by the previous owners to prepare the business for sale, so you may need to lower your expectations slightly.)
Regarding specific franchise industries, there are some general averages available, but those can vary significantly.
For example, according to a report in the Franchise Business Review in 2016, education and automotive franchises averaged approximately $106,000 a year before taxes, whereas travel and entertainment franchises earned an average of $38,000. The food and beverage industry franchise came in at around $90,000 before taxes. All that said, some restaurants make much less than that and others defy the odds and make upwards of $1 million. So how do you evaluate how much money your franchise can make? Read on.
Financial Details
When considering your potential for profit, there are many important details to review. Many people go into a deal with overinflated financial expectations because they don’t review and consider all of the financial details. Some of these will be addressed in the Franchise Disclosure Document but others may not. When you review the FDD, keep in mind that the Item 19 may reveal numbers such as average gross sales/revenue, but it may not include deductions for all of the business expenses.
So, how do you get more earnings information than the franchise might provide on Item 19? The best way to get detailed, accurate financial earnings and cost information is from current franchisees. Many owners will be happy to help you understand the financial performance of their business. Keep in mind, they likely asked the same questions before they became franchisees.
To make a smart decision, it’s important to do a thorough examination of past expenses and explore potential new expenses such as renovations.
When doing calculations on your annual income potential, be sure to deduct your payments for financing the purchase of the franchise and allow funds to reinvest some of the profits back into the business. It’s also important to remember that you are also building equity in a business that could be resold at a later date.
If you’re not financially minded, it’s best to make sure you learn about the basics of accounting, but then hire an expert to provide more in-depth analysis and ongoing support.
While understanding the financial side and having accurate projections is imperative for obtaining a loan, keep in mind that money is not the only the reason people decide to start their own business. For example, it might be worth it to you personally to choose a franchise with lower profits so that you can enjoy a more family-friendly schedule. It really depends on your personal goals.
Your Market & Location
A critical factor in business profit is location and local market factors. For example, a franchise business located in a new development in a high-growth area might be able to experience significant growth. However, if there ends up being an oversaturation of that type of business in that area, one cannot expect the same profitability. If you are buying a brick-and-mortar business, the key is locating your business in a high-growth, high-traffic area next to already successful businesses on the correct side of the road for travelers coming to or from work or another local attraction.
On the professional service side, if you are located in a small country town, your profitability is going to be limited compared to a thriving metropolitan area. The local demographics can also be a critical component. 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. Other customer demographics that play into the picture are your target market’s education, age and local culture/mindset.
The key here is to do your market research up front to minimize mistakes and maximize success.
Marketing Support & Knowledge
When buying a franchise, 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? If so, you would be wise to start with the systems that are proven and then experiment with your own local marketing efforts if allowed in the franchise agreement.
Another question to consider is how much flexibility you will have to cater to your local market. If marketing is too constricting, you may not be able to adapt to the needs of your local market, which can hurt your ability to be profitable.
For example, in one hotel chain, the corporate office decided to require a set menu throughout the country. But one hotel was located in a high tourism area in the Southwest. While the standard menu was helpful in many ways, the lack of ability to add a local “hot” item, such as enchiladas that appealed to tourists, limited marketability and profitability.
Another important factor to realizing a higher income is to be patient with your marketing efforts. While a few marketing strategies bring in immediate results, many strategies require time to build. Educating yourself about marketing strategies and being aggressive in their implementation can make or break your profitability.
Controlling Operational Expenses
Even if you do your research and all of the factors present a green light to move forward, once you buy the franchise, you will need to work hard to ensure that your operational costs are in line. If they get off by just a half of a percent, your profit can be seriously undermined.
To make sure your costs are controlled, pay close attention to your profit margin. It takes a lot of vigilance to consistently monitor labor costs and/or cost of goods sold, but it is critical to maximizing your profit.
Final Thoughts
While it’s tempting to latch onto the average income statistics, the reality is that all these factors can significantly alter the outcome of your profit margins. It’s really up to you to learn as much as possible to make smart decisions upfront and then to put in the hard work to implement marketing strategies, provide excellent customer service and control costs.
The good news for those who buy a franchise is that the franchisor has already done much of the hard work of determining what will be successful, which means it’s generally a more stable route to a steady annual income than starting a business idea from scratch. And, you will have an opportunity to talk to franchisees to ask simple, but important questions like: “Would you do it again today?” If current owners are optimistic about the future of their business, it’s a great indicator that the franchise is trending upward with a positive profit.
If you’re considering buying a franchise, FranNet Central Texas and FranNet West Texas Rio Grande Valley offer free seminars, counseling and support to assess your readiness and fit for specific franchise opportunities. We offer franchise support services throughout Central, West and South Texas including but not limited to the cities of Austin, San Antonio, Waco, Killeen, Laredo, El Paso and The Rio Grande Valley. To contact someone to receive support, call us at (512) 329-2613. For a specialist in your area, click here.