Are Franchises Profitable?
Unfortunately, “Are Franchises Profitable?” isn’t a simple yes or no question. There are some franchise chains that have a failure rate of just 1%, while others have one that is substantially higher. There is no “one size fits all” approach to finding a profitable franchise.
In general, the success rate for franchises is comparable to independent businesses. The success of each franchise unit is dependent on the sum of several factors including location and market dynamics, along with the work ethic and business savvy of the franchise owner.
Though there’s not a single way to determine a profitable franchise, the most profitable franchises typically:
- Have efficient processes and procedures that can be replicated across all of its locations so customers have an idea of what to expect.
- Have a product or service that is adaptable for different customer profiles.
- Have a product or service that is adaptable to changes in customer trends over time.
- Have a system in place that can support its franchisees adequately.
- Have an established rapport with customers that can be leaned on when downturns happen.
While not a complete list, the presence of the factors listed above are a good indication that a franchise has the foundation to be profitable.
How Much Money Will I Make?
It’s extremely important for prospective franchisees to carefully research specific franchise systems and decide which offer the financial payoff they are seeking.
To help you with your research, listed below are a few key considerations to help you make the very best possible investment decision for your personal and professional success.
A Good Place to Start
One of the best places to start your research into whether or not a franchise opportunity has the potential to be profitable for you is the franchise disclosure document (FDD) of the franchise you’re interested in, specifically Item 19.
Item 19 in an FDD is for earnings claims, now also called financial performance representations (FPRs). FPRs can give you a clearer picture of what the path to profitability will be like when you buy a franchise, even though they shouldn’t be taken as a predictor of what will occur. Keep in mind, Item 19 financial disclosures aren’t required, but more franchises than ever are including them in their FDDs.
Revenue ≠ Profit
Revenue is the total amount of money a franchise unit attains in a given time period. Profit is the revenue of a franchise minus the amount it takes to run the franchise (operating costs) in that given time period. For example, if you make (x) in revenue and franchise operating costs are (y), your profit will equal (x) – (y).
Operating costs include inventory purchases, administrative dues such as maintenance and office requirements, personnel fees such as salaries, promotional fees, insurance, rent, property taxes, and other assorted business needs. (Note: operating costs commonly decrease after the first year of operation and stabilize relatively soon thereafter.)
The Role of Franchise Choice in Profitability
Profitability starts before you buy a franchise. In addition to minimizing the initial investment as much as possible, one strategy to finding a profitable franchise is to keep an open mind when considering the various different industries available to you.
Ask yourself, from examples A to C, which franchise you would choose based on each description?
Franchise A:
- In fast food industry.
- In business for decades.
- Has strong international presence.
Franchise B:
- In child education industry.
- In business over 30 years.
- Operates in one country.
Franchise C:
- In fitness industry.
- In business 10-15 years.
- Operates in less than 15 countries.
Here are the same franchises with financial data for one unit. Would you still choose the same franchise after looking at some of the financials?
Franchise A:
- Total revenue: $1,115,990.
- Operating expenses: $963,390.
- Profit/income: $152,600.
Franchise B:
- Total revenue: $889,413.
- Operating expenses: $646,486.
- Profit/income: $242,927.
Franchise C:
- Total revenue: $454,200.
- Operating expenses: $315,300.
- Profit/income: $138,900.
Many prospective franchisees place too much emphasis on franchise popularity when choosing which to research and when making their final decision.
While popularity can help to ensure the brand and concept is well established with potential customers, choosing a franchise concept that locally fills a niche or void in the market, without over emphasizing its current popularity level, can also prove most profitable.
Local need often boosts demand and popularity with time, and franchisees seeing such opportunities can benefit.
Location, Location, Location
The mantra directly above is often associated with personal real estate, but it holds true for franchises as well.
Your business location will have a huge impact on your financial success, possibly as much as the product or service you will be providing, and location goes far beyond zoning regulations.
Before you submit a location to your franchisor for approval, survey it extensively while considering the following:
- What are the immediate costs to renovate or start fresh with a new build at the location?
- If you are leasing a location, how much is your lease? Lease terms are a significant operating cost. As illustrated above, operating costs are one of the main determinants of profitability.
- Will your unit be in position to receive enough foot and vehicle traffic to profit?
- Is it relatively easy to enter and exit the property? If not, customer traffic could be affected.
- What kind of neighbourhood are you in and is there an adequate population of potential customers who will enjoy your product or service?
- Are other businesses near your franchise complementary or competitive?
Don’t Be Afraid to Ask Questions
Perhaps the most important aspect of finding a profitable franchise for you is talking with current franchisees.
In addition to Item 19, the FDD will provide a list of franchisees for that specific franchise. Use this list to locate franchisees who will speak with you and help you to create a clearer picture of your business future.
Some good questions to ask concerning earnings are:
- How much was the total initial investment?
- Did the total initial investment differ significantly from the figures given in the FDD?
- How long were you in business before your franchise unit made a profit?
- Are your profits consistent each year?
- How supportive and involved is the franchisor in your operations?
- Do you have to buy certain items from the franchisor or required vendors? If so, do you feel you pay ideal rates, or could you find better rates elsewhere?
- If you could go back and choose another franchise system, would you? If so, why?
You may not get specific answers to these questions because several franchisors do not authorize franchisees or franchise representatives to make financial representations about a franchise unless dealing with an incoming franchisee buying an existing outlet.
Despite this, holding a conversation with current franchisees will help you tremendously when making your final decision.
What are the Most Profitable Franchise Industries?
Any franchise can be profitable if the area it’s located in has enough of a potential customer base and demand. However, it’s good to think about certain industries that have shown a history of success for others in achieving a profitable franchise when researching franchises.
Over time, the most profitable franchise industry has been food. All people need to eat, and this is why food franchises will always be top money-makers. But don’t just think about the big juggernauts like McDonald’s, Pizza Hut, Burger King, etc. Read up on consumer trends, especially in your area, to find what people like eating that could be developing staying power.
Wrap-up: What to Look For
So, what are the main considerations you should make in your quest to find the most profitable franchise for you? Franchise industry expert Joel Libava, ‘The Franchise King’, says profitable franchises have three things in common:
- They offer a superb product (or service).
- They have top-shelf marketing.
- They focus on making sure their franchisees are making money!
Tips for Finding Your Profitable Franchise:
- Be on the lookout for press releases that announce milestones that franchisors are hitting.
- Look for good news on specific franchises as a starting point.
- Check out their websites. If the concept seems like it could be a fit, contact them and request information. If you want to be really efficient, you can use a franchise portal to contact several franchise opportunities that you’re interested in.
- Do great research and ask current franchisees if they’re profitable.