WHAT IS THE AVERAGE INCOME OF OWNING A FRANCHISE?
The number one question that every potential franchisee wants to know is, “How much money can I earn as a franchise owner?” The quick answer is that if you’re lucky, you can get rich. Alternatively, you can lose your entire investment. The reality of most franchisees is somewhere in between.
Exactly how much money you will earn as a franchise owner is a difficult question to answer. Many factors affect your potential income – the most important ones include the brand you invest in and your performance as a business owner.
Franchisors are quite frank about what it will cost you to enter their systems. They happily describe franchise fees, royalties, marketing requirements, and opening costs, and can quantify the numbers of prospective franchisees on everything from the amount of printer paper they will spend each month for the best deals on neon signs. But franchisors are shy when it comes to knowing how much money franchisees can earn from running their businesses.
This reluctance is logical to some extent. Any revenue claim that a franchisor makes, directly or implicitly, can open the business for judgment if a disgruntled franchisee does not achieve these goals. Instead of providing you with the necessary information, the franchisors direct people to their franchise disclosure document (FDD), which is the detailed prospectus required by law to give interested investors.
Point 19 of the FDD details the financial performance of the franchise and provides an overview of the average income generated by a franchisee. But Item 19 is recently calculated with a twist that would make a magician proud, with the numbers turned to put the system in the best possible light. Documented earnings ranges can be so large (for example, $50,000 to $500,000) that they are meaningless if shared, as the completion point is optional.
So, how much can you earn by opening a franchise unit? According to an extensive survey by the research firm Franchise Business Review, the average franchisee across the spectrum makes a profit of $ 66,000 per year. Besides, it is difficult to generalize, as there may be significant differences between the concepts, even in the same sector.
The Average Revenue of Having a Franchise
Examining a franchisee’s “average salary” is inappropriate. Although income statistics exist for this category of employees, owning a franchise is not a salaried position. Like other entrepreneurs, franchisees earn their revenue from the performance of the franchise they own. This produces a wide range of possible gains for people with this job description.
According to an employment resources website, the average income for a franchisee in the United States is $ 128,000. It should be noted again that this income is generally not a salary, as defined in other jobs. Instead, this revenue represents the profit from operating the franchise business as a whole.
The “average salary” for a job is an illusion: although it represents a median or average income, few people earn that specific amount. For franchisees, the average salary is even less significant. Successful owners of several franchise sites make millions of dollars each year, and each year hundreds of franchise owners close their doors at a considerable loss.
Some franchise opportunities represent substantial business opportunities with legitimate franchise support. Others are cynical attempts by unscrupulous entrepreneurs to take advantage of the American dream of becoming a business owner. If you want to become a franchise owner, carefully review the policies, performance, and reputation of the franchise you are considering joining.
Franchisees should take franchise buying even more seriously, for two reasons. First, a franchise business will likely cost a lot more than a car. Second, unlike buying a car, there is no consumer guarantee when you buy a franchise. Franchisees must be responsible for their own investment decisions.
The disclosure document will inform a potential franchisee who the franchisor is and provide much information about the real business that the franchisee will lead. Most franchisors operate within a group of companies. Most other members of the group will not receive information from the backgrounder – who owns it? Do directors and all companies in the group have a good credit rating? Do they own businesses that the franchisee will have to trust? Could that influence you?
How Much Can You Earn As a Franchisee?
It is a profitable industry. 97% of the 44,000 franchise units surveyed across Europe are currently operating in terms of profitability, and more than half see an average turnover of over $322,000.
These are impressive statistics. But, as the sector is vast, it is difficult to determine the franchisee’s average income. The projected revenue numbers created by different franchises show extremely different numbers. For example:
The Kumon Mentoring Franchise states that franchisees of 100 to 300 students can expect to earn 30,000 to 100,000 a year.
As a result, we would say that owners of profitable franchise units can expect to earn an income of about $56,000 or more per year.
Five Facts About A Franchise Income
One of the best things about being your own boss is the ability to increase your income. By making strategic changes to the way you work, you can significantly increase the amount of money you earn. But as Here are five essential facts about the franchisee’s income:
Nº1 Increasing The Number Of Hours Worked Will Increase Your Salary
The amount you earn will depend on how long you are ready to invest in your new business. While some franchisees choose to work part-time or open a seasonal franchise to continue existing commitments, franchisees who run the most profitable businesses generally work full-time.
Although franchisors offer training and support you will probably still need to spend a few extra hours as well. Remember that starting a business is difficult, even if you can rely on a proven business model and a predefined brand identity.
Over time, the more time you spend on your business, the more likely it is to be profitable, and the more money you end up in your pocket. So if you want to increase your income, think regularly about how to generate more sales, attract more customers or expand your business.
Nº2 Making The Most Of Your Skills And Experience Can Help You Maximize Your Profits
If you join a franchise belonging to an industry you don’t know, you will spend a lot of time getting to know the industry, the franchise’s business model and its target market. So, save time by choosing an industry you’ve worked in. Use your knowledge and skills to speed up the setup process and achieve break-even faster than you would otherwise.
Not only should you be able to make a quick profit, but you may even be able to increase your check payment. The franchisor will allow you to follow a training program. However, if you have specialized knowledge and experience superior to that taught to other investors, you can maximize your income.
Nº 3 By Examining The Franchisor’s Financial Projections, You Will Have A Better Idea Of Your Earning Potential
Franchisors typically publish potential earnings from new investors based on the earnings of existing franchisees. These projections must be as accurate as possible and must be found on the revenue of a franchise with characteristics similar to those offered to a new franchisee. I believe this is stated in the FDD (franchise disclosure document) as well so you should mention where that is
Of course, the franchisor can choose to disclose the proceeds of its most profitable franchises through FDD to attract investors. Therefore, it is a good idea to ask an accountant to carefully review all financial projections and find out how viable they are.
Ideally, the business plan you write at the beginning of your franchise journey should predict profitability within a year or two. It will take a long time to start the business, but, of course, the exact schedule will depend on the size of the franchise and the sector and the location in which it operates.
If you are not satisfied with the projections or if your accountant considers them inaccurate, you can get a better future income by going away and choosing a franchise with more impressive statistics.
Nº4 Indirect Costs Have A Huge Impact On The Franchisee’s Salary That You Take Home
This may look obvious, but it is crucial to keep in mind. When opening a franchise, you will likely see expenses in the form of rent, utilities, insurance, taxes, interest on commercial loans, shares, employee salaries
This will hurt any profits you earn. Your prices should be high enough to maximize your return on investment, but low enough to encourage customization. This balance is essential, as is due diligence to ensure that you are investing in a franchise that has created a reasonable pricing structure and considered ways to minimize overhead, such as allowing franchisees to work from home.
Remember that low-cost franchises can generate profits with a low number of sales, while more expensive franchises in privileged locations will only be rewarded after a much higher sales volume. When choosing the franchise to which you belong, be sure to take into account investment requirements, ongoing costs, and pricing structure. Make sure the combination has the potential to provide the income you are looking for.
Nº 5 The franchise fees are a crucial indicator of its future profitability
There are two types of franchise fees required by the franchisor:
- Fixed costs
- Percentage of commercial sales
If your franchise unit’s profitability decreases, you may find it challenging to pay a fixed franchise fee. But if it increases, you will pay relatively low costs. On the other hand, if the same franchise sends a percentage of its sales to the franchisor, the amount needed will decrease according to the franchise’s total profit. Therefore, paying a percentage-based fee can be less risky for franchisees than accepting a fixed price – unless, of course, you are sure that your business will be very profitable.
Percentage rates are also beneficial because they encourage the franchisor to provide more training and support to help businesses become profitable, the higher the profits, the more money the franchisor will earn.
Therefore, if you are paying royalties as a percentage of your sales, it is likely that you will also receive high-quality training and support. This, in turn, will help you to earn a higher income. If you want to maximize your profitability, carefully consider your preferred franchise fee structure, and select your franchise accordingly.
How Does A Franchisor Make Money?
Making money with a franchise system is very different from doing it with other types of businesses. The franchisor not only obtains revenue from goods or services sold by the only companies belonging to the company, but also from franchise fees and royalties that they sell to franchisees. The different financial requirements and nuances of the franchise systems, therefore, require a different approach than the one that could be adopted if exploring a traditional commercial offer.
A franchisor does not have the vocation to share his products, trademarks, and suppliers with third parties willingly, his activity is to make money, but how does a franchisor make money? The simple answer is through the cost of the investment and the royalties they receive from their franchisees, but that is not the real way for a franchisor to make money.
Franchisors’ Investment Cost
While it is true that the franchisor makes money from its franchisees, the point at which a franchisor’s investment in a new franchisee reaches breakeven is, on average, 18 to 22 months in a new franchise unit. This may have surprised those who thought that the initial fees or investment costs are those in which a franchisor makes a profit.
The investment cost of a franchise opportunity exists to cover the damage to the franchisor in terms of hiring a new franchisee, and this usually includes covering a selection of the following items:
- Recruitment costs
- Training costs
- Additional website development
- Development of a marketing plan
- Other systems/support staff
- Technology implementation
- Writing and consulting documents
- Legal fees
This is the path taken by most franchisors; however, it is known that some franchisors will use franchise fees to make a profit. While this does not make franchising impractical, this technique has led to problems in the past, in which a franchisor tries to attract as many franchisees as possible, without asking whether it will be successful. This means that they are not concerned if the franchisee is making a profit, they want to involve them. Prospective franchisees should take this into account when approaching franchisors, and this can be measured with questions about the franchisees’ success rate and what exactly is covered by the cost of the investment cost.
The royalties that a franchisor receives are the real element on which most franchisors earn money. The payments received by a franchisor will be defined in the franchise agreement, but will typically take the form of a fixed flat fee or a percentage of the gross value or profits of the franchisees’ business unit.
Self-sufficiency in royalties is the point at which franchise royalties cover all indirect costs of the franchise system. For any franchise system in any industry, this is what all franchisors must strive for at all times. According to the industry, sector, etc. of the franchisor, and the franchisor must seek to achieve this goal by opening 100 franchisees within five years of the start of the franchise system.
As a franchisor, your optimal position is to achieve a state where your sovereignties cover all indirect costs of the franchise system. To find a good pace, you need to get the most extreme conceivable measure of eminences from each franchisee. This doesn’t mean to increase the percentage you receive from their gross or profit. And what we mean by that is to increase gross profit or a franchisee receives. If your franchised business unit improves, it will generate more gross revenue each month, which in turn will increase your royalties.
So, to answer the whole question here: a franchisor earns his money by ensuring that his franchisees are successful, and in return, a franchisor will receive a higher fee.
How To Maximize Royalties
Your goal should be to maximize the savings from franchised units, shorten the time needed for the franchisee to reach breakeven, and minimize the time during which a franchise is opened without trade, every minute the franchise is opened without you trading it costs money.
The first step in maximizing the royalties you receive from your franchisees is to hire the ideal franchisees first. Some people are more suited to the franchise and its franchise model, and it is your job to hire only those who can succeed in your business model. If you get this piece right, each next step will become exponentially easier.
Assuming you have found the most appropriate franchisee, the following step is to try to reduce the time it takes for the franchise unit to start making money. You can do this by providing a boost toward the beginning of the activity to ensure they have the support they need to get started. This can take the form of many different tasks, but some types of assistance can take the form of:
- Lend staff to train employees or operate equipment before franchisee employees are ready to take control
- Provide the best technology and equipment from the start
- Visit the franchise unit during the first two months to address concerns that the franchisee may encounter early
The third step is to identify the weaknesses you have in your royalties, and these will be your under-performing franchisees. Once you have identified the unfortunate results of the franchisee, you can approach them to change that. While this is not a step, it is essential to note that if you want to maximize royalties, you must be honest and open with your franchisees. If you reject or run away from franchisees or complicated problems, you will quickly discover that they will harm your royalties.