Editor’s Note: Looking into business franchising? Francihse you’re looking for information to help you choose the one that’s right for you, use the questionnaire below to have our sister site, BuyerZone, provide you with information from owndrs variety of vendors for free:. However, we know that average numbers can be very misleading since a few top-performing franchisees can artificially inflate. The bottom line is that many franchisees earn far less money than they had originally planned because they failed to do franchise owners make money their homework. When we whittled down the number of franchisees we surveyed to just over 6, who own three or more same brand franchises, the revenue figures changed. Crunching the numbers to try to estimate how much money you can potentially make by investing in a particular franchise can be challenging. Items 5, 6, and 7 of the FDD covers initial fees, other fees i. Item 19 of the FDD, also called Financial Performance Representations FPRwill provide information related to the actual financial performance of the franchise at the business unit level. To determine profitability, the cost of labor, rent, supplies, insurance, royalties, ad fees and all other business expenses must be deducted from the sales figure.
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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.
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The good news
Alternatively, you might lose your entire investment. The reality for most franchisees is somewhere in between. Exactly how much money YOU will make as a franchise owner is a difficult question to answer. There are many factors that will influence your potential earnings — the biggest of which include the brand you invest in and your own personal performance as a business owner. These are most often the people that end up owning multiple franchise locations and have built a successful team of people around them. This group represents only about 20 percent of the franchisee universe, yet it is their success stories that attract thousands of people to invest in a franchise every year. So what about the other 80 percent you ask? For this example, we are going to look at the food and beverage sector. It is important to note that earnings, costs and profitability will fluctuate by sector. Not bad, until you factor in the long hours and high initial investment that come with many food businesses. The good news is that our top food franchises report average earnings 15 to 20 percent higher than their competitors. While aggregate income data like this can be an interesting starting point, it is important to note that average numbers can be misleading.
Alternatively, you might lose your entire investment. The reality for most franchisees is somewhere in between. Exactly how much money YOU will make as a franchise owner is a difficult question to answer. There are many factors that will influence your potential earnings — the biggest of which include the brand you invest in and your own personal performance as a business owner. These are most often the people that end up owning multiple franchise locations and have built a successful team of people around them. This group represents only about 20 percent of the franchisee universe, yet it is their success stories that attract thousands of people to invest in a franchise every year. So what about the other 80 percent you ask? For this example, we are going to look at the food and beverage sector. It is important to note that earnings, costs and profitability will fluctuate by sector. Not bad, until you factor in the long hours and high initial investment that come with many food businesses. The good news is that our top food franchises report average earnings 15 to 20 percent higher than their competitors. While aggregate income data like this can be an interesting starting point, it is important to note that average numbers can be misleading. Average income data includes all franchisees together — both single and multi-unit owners — as well as franchisees that have been operating for many years. In most cases, median income data can be much more useful, and more accurately predict what you or the typical franchisee might earn.
The 80/20 Rule
I’m looking to buy into GNC, but I don’t want to invest a large amount and make very little or nothing, any advice, tips, anything is helpful. Franchisees franchise owners make money typically in the same manner an independent company makes money. The difference being the franchisee typically has to pay a monthly royalty that is a percentage, in some cases a flat fee of the gross sales back to the franchisor. There are charts of costs in the FDD also to aid you in creating your own business plan. In addition, you can speak to franchisees of the system to determine not only their satisfaction with the brand but also their return on investment. Once you have gathered all your data make a list of what types of activities the business requires to be successful and determine if you have the skills and desire required to execute on those activities. If you determine the answer is yes then you may want to complete your business plan by creating high, medium and lower ROI models to help make a final decision. You make money the same way any other store owner makes money — you sell enough products with enough markup to cover your costs then some.
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The 80/20 Rule
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 do franchise owners make money, 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 FDDthe 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 do franchise owners make money 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.
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