The question above is possibly the most commonly wondered question when prospective franchisees consider a franchise opportunity. Each franchisor’s Franchise Disclosure Document (FDD) includes a section covering this matter, though many franchisors (by some estimates as many as 75 percent) forego providing specific numbers to incoming franchisees. A primary reason for non-specific financial disclosure involves franchisor objectives to manage the expectations of incoming franchisees. Thus incoming franchisees like you must take the initiative to carefully research specific franchise systems and decide which offer the financial payoff you are seeking.
There is no “one size fits all” approach to finding a profitable franchise. The success of each franchise unit is independent and the sum of several factors including location, market dynamics, and franchisee work ethic. Listed below are a few key considerations to help you make the very best possible investment decision for your personal and professional success.
Revenue ≠ Profit
When looking at particular franchises, one important thing to keep in mind: revenue DOES NOT equal 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
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 example A-C, which franchise would I choose based on each description?
- In fast food industry
- In business for decades
- Has strong international presence
- In child education industry
- In business over 30 years
- Operates in one country
- 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?
- Total Revenue: $1,115,990
- Operating Expenses: $963,390
- Profit/Income: $152,600
- Total Revenue: $889,413
- Operating Expenses: $646,486
- Profit/Income: $242,927
- Total Revenue: $454,200
- Operating Expenses: $315,300
- Profit/Income: $138,900
For more financial disclosure examples, please view the images below. Click on the magnifying glass icon on the top right corner of each image to enlarge.
Many prospective franchisees place 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.
The necessary investment amount also greatly affects potential financial gain or pain. Lack of funding access for certain franchise concepts certainly requires exploring the various franchise industries, each with its own range of investment levels. There are also several methods of financing a franchise venture that increase funding accessibility for franchisees from various backgrounds.
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 neighborhood 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?
- Is the location conducive to additional future development?
Don’t Be Afraid to Ask Questions
Perhaps the most important aspect of finding a profitable franchise for you is talking with current franchisees.
The FDD will provide a list of franchisees for that specific franchise. Use this list to locate franchisees that 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.
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? Joel Libava, “The Franchise King”, provides his top tips:
Profitable franchises have 3 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!
How to find one of these?
- 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 their profitable.