How Much Money Can You Make Owning a Franchise?
If you Google the national average income for a franchise owner, you’ll find answers ranging anywhere from $50,000 to $200,000+ per year. The real answer is that this number is largely irrelevant, as the average income varies greatly from franchise to franchise and business owner to business owner. In addition, the range doesn’t take into consideration upside income potential from a sale of the business nor the downside risk of losing the money you invest and more (which is a possibility that needs to be considered). This means that you’ll have to do your own research to make sure the brand you’re interested in can meet your financial goals as well as weigh the risks associated with a franchise investment. To understand income and loss potential it is important to understand what a franchise is. In short, the purchase of a franchise provides you (The Franchisee) the rights to a business model and its trademarks for a period of time, in a defined territory, in exchange you provide the Franchisor (entity that sold you the franchise) Royalties and other fees for the term of the agreement for ongoing support. There are many other stipulations along with a franchise agreement. But in short, you are an independent business owner that is operating under another brand’s marks with some training and support.
A franchise isn’t passive and won’t generate a return or income automatically, it’s a complex business transaction that involves the creation of an entity that you own and ultimately have to operate as a normal business. It will have a P&L and most likely a large investment that is made upfront that will need to be paid off with business income before you receive a return.
A large part of researching a franchise opportunity is figuring out if you can operate the business effectively and whether the financial representations make sense from an operations perspective. A Franchisor cannot directly answer income questions or provide projections because frankly, it is out of their control. Instead, they can provide and reference data that they provide you in a standard format – called a Franchise Disclosure Document (FDD). This document discloses important nuanced information on the franchise offer.
The problem is that even though a Franchise may be based on a business model that is operating successfully or generating profit/revenue for a Franchisor or other Franchisees, there is no guarantee that you will be able to replicate that or that your market can support this business. In addition, Franchisors are not required to guarantee your success (and essentially none of them do). So if you fail, you will be left with the costs incurred on a failed venture.
Due to this very real uncertainty, Franchisors cannot explicitly make earnings claims or forward-looking projections for a potential Franchisee. The Federal Trade Commission (FTC) regulates the franchise buying process, and this is probably the most important restriction they impose on Franchisors and franchise salespeople.
Why can’t franchises tell you how much money you’ll make?
The intention of this restriction is to protect you, the franchise buyer. franchisors can choose to provide financial representations about their business in their FDD, which is based on the past financial performance of corporate and/or franchise units. It is important to note that most FDD’s are updated once a year (typically before the end of April of each year) and if a franchisor decides to make a financial representation in their disclosure document it will typically show financial data from the prior year.
Even if the information shared looks great, that does not necessarily mean you as a franchisee will achieve those numbers or operate your business with the same results. At the end of the day, you are a business owner running another brand’s playbook that has the potential to fail or to succeed. Buying a franchise does not guarantee that you will run a profitable business, generate the same revenue, or incur the same expenses.
It is important for you as the buyer to review a brand in a non-biased way, which is why the FTC requires that you spend at least 14 days reviewing the brand’s FDD.
Where do I find a franchise’s financial representations?
The FTC requires all franchisors to provide an FDD on their offering during the franchise buying process. If you’d like an FDD on any of our brands just ask us.
In every FDD, there is a section called “Item 19” where franchisors may provide financial representations. These representations present historical financial data based on the performance of other operating locations for that franchise brand, which may include: outlet sales, costs, profits or losses.
Some brands provide full profit and loss statements for their locations while others provide less information, such as fewer revenue and expense representations or even just average revenues. Those who provide less information may not have access to all of that data from their franchise owners or choose to limit the information in their FDD.
Your job as a potential franchise owner is to take that data and build your own financial projections while talking to other professionals (franchise attorneys, accountants, and family/friends / advisors with related business experience). It is also recommended that you try to obtain financial information from current and former franchisees – you can find their names and contact information in Item 20 and Exhibits in the FDD.
In addition, you will want to refer to Items 5 and 6 to understand the fees paid to a Franchisor like Royalties, Marketing Fees, and Technology Fees, all of which will affect the potential to make returns.
How Much Do Franchise Owners Make?
The thought of realizing the American dream by owning a business and being your own boss is an enticing prospect for millions of Americans. Unfortunately, a lot of people are not always sure where or how to start. One of the most convenient paths to small business ownership in the United States is investing in a franchise. A franchise can be understood as a licensing agreement that enables a party (franchisee) to have access to proprietary knowledge, trademarks, and processes of an already existing business (franchisor). The license also allows the franchisee to operate under the franchisor’s name. The franchisee pays an initial start-up fee and an annual franchise fee in exchange.
But how much money do franchise owners really make? This is a question that almost everyone thinking of buying a franchise asks. Unfortunately, there is no simple answer to this question. In any case, most franchisors avoid disclosing this kind of information to shield themselves from litigation. This is because if a franchisor promises a given figure and the franchisee is not able to achieve it, the franchisor may face a lawsuit. For this reason, most franchisors only point to item 19 of the franchise disclosure agreement (FDD). Item 19 of the FDD sets out the financial performance of a franchise and provides a glimpse of the average revenue that a franchise business owner can make.
Understanding what you can earn as a franchise business owner is quite situational. This is because the franchise industry has dozens of business concepts with varying revenue potential and operational costs. However, researchers have some insight into the income of a typical franchise owner. However, it is important to note that the available information is quite vague.
The Numbers of Buying a Franchise
Some researchers have tried to crunch the numbers with the aim of helping potential franchise owners get an idea of the income that they can expect by buying a franchise. According to a survey done by Franchise Business Review involving 28,500 franchise owners, the average pre-tax annual income of franchise owners is about 80,000 dollars. However, this number should be taken with a grain of salt bearing in mind that it could be inflated by the high incomes of a few top performers. When researchers accounted for the inflations caused by the few top franchises, it was established that the average annual income of 51 percent of franchisees is less than 50,000 dollars. The study also found that only 7 percent of franchise owners earn over 250,000 dollars a year.
The survey by Franchise Business Review also found that about 21 percent of franchise opportunities are in the quick-service restaurants’ industry. This is despite the fact that restaurant businesses require a bigger initial investment compared to some other businesses with almost similar profit potential. On average, franchise owners in the restaurant industry take home about 82,000 dollars a year. However, the start-up cost can be anywhere between 100,000 dollars and a million dollars.
Factors That Can Influence What a Franchise Owner Gets
Clearly, determining how much you are going to make as a prospective franchisee can be quite a daunting task. The truth is that it is very unlikely that any two franchise owners are going to make exactly the same amount of money in a given year. Some of the factors that influence the profitability of a franchise include:
Business Expertise of the Franchise Owner
Of course, one of the main benefits of buying a franchise is that you will benefit from the franchisor’s expertise, leadership, and guidance. However, like in any other business, your own work ethic and business knowledge will significantly influence your success. The more knowledgeable and hardworking you are, the more likely it is for you to succeed as a small business owner.
When you buy a franchise the franchisee will probably advise you on controlling stock to minimize inventory cost, meet client demand, and ensure adequate stock turn. But your profits can also rely on your ability to minimize costs. If you are committed to minimizing operational costs without compromising on the quality of services, then you can achieve higher business profit.
As much as you are going to benefit from the loyalty of the franchisor’s customer base, you also have to do your bit to keep them coming back. To this end, you need to hire qualified people who can provide quality products and manage business operations properly.
The Bottom Line
In a nutshell, it is apparent that buying a franchise is quite a great idea for people who would like to become small business owners at the minimum risk possible. This is because a franchise enables new business owners to benefit from the brand reputation that a franchisor has taken dozens of years to build. It also gives the franchisees access to the proprietary knowledge and processes of the franchisor. Besides, if you get everything right, a franchise can be a great way for you to make money and live the dream of your best life.