In this article, we’ll take a look at some important considerations before you dive head-first into franchiise franchise purchase. Start-up costs and royalty fees can put a serious damper on a franchisee’s how much money can you make buying a franchise pay. The real kicker, however, is the ongoing royalty fee. Here’s how it works: Each and every year, franchisees must pay the franchise a fee hos to a percentage of sales. It also means that no matter how successful you are as a business owner and how innovative you are at driving revenue, you’ll always have two partners: Uncle Sam and company headquarters. The unfortunate part is that royalty fees are pretty standard in the franchise world. In fact, Burger King mucj its franchisees 4. Subtract payrollfood costs, and taxes—in addition to these royalties—and it’s easy to see why being a franchisee may not entail the life of luxury you imagined. Mondy order to maintain consistency among their offerings, most franchises insist that their franchisees buy raw materials directly from them or from a supplier with which they have an exclusive relationship, meaning they often receive rebates on what the franchisees order. In any case, the prices they charge for these materials caan the company or the supplier are often much higher than what the materials would be sold for. Some franchises have been sued for charging franchisees high markups on supplies. After all, produce is produce, right?
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This story appears in the January issue of. OK, so you think you’re ready to buy a franchise. You’ve done some research. You’ve weighed the pros and cons. You’ve selected a business with an interesting product. You even know what you’ll wear to work and how many hours you expect to be. Yet in spite of how much preparation you’ve done, you still don’t know the answer to the most pressing question: Will your business make money? No franchise company—no matter how glorious its track record—can guarantee financial success. But you have a much better chance of having a winning proposition if you follow these practical pointers before you sign on the dotted line. Know thyself. Choose a business in which you really believe you can excel—a business that matches your singular set of skills and interests as closely as possible.
General Income
Assess your strengths, weaknesses and blind spots. Visit existing units of the franchises you’ve targeted and talk to the franchisees. Are they like you? Are they more driven or far more laid-back? Volunteer to work in a franchise for a few days, then decide if you’re truly passionate enough to own one.
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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 fees, 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 FDD , the 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.
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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.
Feeling the Burn
Skip navigation. Thinking about buying a franchise? Investigate before you invest. Before you sign on the dotted line, read byying guide for advice on evaluating franchise opportunities. When you buy a franchise, you may be able to sell goods and services that have instant name recognition, and get training and support that can help you succeed. It suggests ways to shop for a franchise opportunity and highlights key questions you need to ask before you invest.
A franchise enables you, the investor or franchisee, to operate a business. For example, the franchisor may provide you with help in finding a location for your outlet; initial training and an operating manual; and omney on management, marketing or personnel. The franchisor may provide support through periodic newsletters, a toll-free telephone number, a website or scheduled workshops or seminars.
Your initial franchise fee will typically range from tens of thousands of dollars to several hundred thousand dollars and may be non-refundable. You may face significant costs to rent, build and equip an outlet and to buy initial inventory. You may koney to pay the franchisor royalties based on a percentage of your weekly or monthly gross income.
You also may have to contribute to an advertising fund. Some portion of the advertising fees may be allocated to national advertising or to attract new franchise owners, rather than to promote your outlet.
To ensure uniformity, franchisors usually control how franchisees conduct business. These controls may significantly restrict your ability to exercise your own buyong judgment.
A franchisor may control:. Muxh franchisors retain the right to approve sites for their outlets, and may not approve a site you select. Some franchisors conduct extensive site studies as part of the approval process and a site franchisse approve may be more likely to attract customers. Franchisors may impose design or appearance standards to ensure a uniform look among their outlets. Some franchisors require periodic renovations or design changes; complying with these requirements may increase your costs.
Franchisors may restrict the goods and services you sell. For example, if you own a restaurant franchise, you may not be able to make any changes hw your menu. If you own an automobile transmission repair franchise, you may not be able to perform other types of automotive work, like brake or electrical system repairs.
Franchisors may require that you operate in a particular way. They may dictate hours; pre-approve signs, employee uniforms and advertisements; or demand that you use certain accounting or bookkeeping procedures. In some cases, a franchise advertising cooperative may require you to sell some goods or services at specific discounted prices, which may affect your profits. Or, the franchisor may require that you buy supplies only from an approved supplier, franchiise if you can buy similar goods elsewhere for.
A franchisor may limit your business to a ,uch location or sales territory. For example, the franchisor may have the right to offer the same goods or services in your sales area through its own website, catalogs, other retailers or competing outlets of a different company-owned franchise. Franchise contracts last only for the number of years stated in the contract.
A franchisor can end your franchise agreement for a variety of reasons, including your failure to pay royalties or abide by performance standards and sales restrictions. Franchise agreements may run for as long as 20 years.
Renewals are not automatic. For example, the franchisor monry raise the royalty payments, impose new design standards and sales restrictions, or reduce your territory. Any of these changes may result in higher costs, reduced profits or more competition from company-owned outlets or other franchisees. Before you invest in a particular franchise system, think about how much money you have to invest, your abilities and your goals.
Be brutally honest. Attending a franchise exposition allows you to dranchise and compare a variety of franchise possibilities at one time. Before you attend, research the kind of franchise that may best suit your budget, experience and goals. When you attend, visit several franchise exhibitors who deal with the type of industry that appeals to you.
Ask questions, including:. Exhibitors may offer you incentives to attend mych promotional meeting to discuss the franchise in. These meetings can be another source of information and give you a chance to franchixe questions, but they may also expose you to high-pressure sales tactics.
Be prepared to walk away from any franchise opportunity — and promotion — that does not fit your needs. Typically, a broker reviews the amount of money you have to invest and then directs you to opportunities that match your interests and resources. A broker also may help you finish applications and the paperwork to complete the sale. Brokers often work for franchisors, and byying paid only if a sale is. That may be true — or not. Ask how many franchisors the broker represents.
A broker who represents only a few franchisors will give you limited suggestions. Some franchise oyu may claim they will suggest only those franchises that meet certain standards.
You may think this means that your buyong is limited because the broker weeds out franchisee investments. In fact, some brokers represent any franchisor willing to pay them a commission for a sale. Ask how the broker selects franchisors to represent. Ask to see the selection criteria and how many franchisors the broker has recently turned. Some brokers earn a flat fee regardless of the price uow the franchise they sell. Others earn a commission based on the cost of the franchise.
These brokers may steer you toward a more costly franchise to increase their commission. Ask who yoy the broker and how the payment is calculated. Find out whether the broker earns a commission based on the cost of the franchise. If he or she does, consider whether the broker is monsy a higher priced franchise in order to earn nake larger byying. To convince you to buy a particular franchise, a broker may talk about how much money you can make.
These claims may not be true or can be misleading. Or the claim may be based on outdated industry data. In some instances, earnings claims may use gross sales figures, but when you consider likely expenses, you may find that actual earnings will be far. Talk to them, rather than relying on information from the broker. Ask about their experience with the franchisor. Purchasing a franchise is like any other investment: it comes with risk.
Is it seasonal or evergreen? Could you be dealing with a fad? Buyin the product or service generate repeat business? How many franchised and company-owned mohey are in your area? Does the franchise sell products or services that are easily available online or through a catalog?
How many competing companies, including competing franchises, sell similar products or services at a similar price? Are those companies well established or widely recognized in your community? Sometimes, franchise systems fail. What will happen to your business if the franchisor closes up shop? Will you have access to the same suppliers? Could you conduct the business alone if you have to cut costs or lay anyone off?
An hlw franchise with a well-known name — and good reputation — is more likely to draw customers than a relatively new or unknown franchise. What mmake and continuing support does the franchisor provide? Does the training measure up to the training provided by other franchisors in the same type of business and for workers in that field?
Can you compete with others who have more formal training? What backgrounds do buyimg current franchise owners have? Is your education, experience or training similar? What do current franchise owners say about the quality and usefulness of the training they received? Many franchisors that operate well-established companies have years of franchisw selling goods or services and managing a franchise. Some franchisors started by operating their own business. Find out how long the franchisor has managed a franchise.
Does the franchisor have enough expertise to make you feel comfortable? If the franchisor has little experience managing a chain of franchises, take promises about guidance, training and other support with the proverbial grain of salt.
In fact, a franchisor that grows too quickly may not be able to support its franchisees with the services it promises. Are they sufficient to support you and all the other new outlets the franchisor plans to open? Under the Franchise Rule enforced by the FTC, you must receive the document at least 14 days before you are asked to sign any contract or pay any money to the franchisor or an affiliate of the franchisor.
You have the right to ask for — mych get — a copy van the FDD once the franchisor has received your application and agreed to consider it. The franchisor may give you a copy of its FDD on paper, via email, through a web page or on a disc. The cover of the FDD must provide information about the available formats. Make sure you have a copy of the FDD in a format that is convenient for you, and keep gou copy for reference.
Should I Buy a Hair Salon Franchise?
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Thousands of entrepreneurs take the plunge and invest in franchises as a way to grab onto the American dream. The lure is having a proven brand concept and training and marketing support to improve the odds of start-up success. But for most, the No. As part of the just-launched » America’s Star Franchisees » list, the 50 franchisees profiled across the country provided annual gross sales figures, many running into the millions of dollars.
Predicting Franchise Profitability with Median Income Data
But as part of its work on the project with CNBC, Franchise Business Review also reviewed profit figures for the vast majority of «Star Franchises» and found that these franchises as a group average three times the net income of the average U. For some, the advantage was starting with a low-cost franchise and hitting the ball out makke the park. Others were able to generate dan high return on investment, even at a greater initial franchise investment. And remember, the franchisees on this list are rock stars, not the average. Unfortunately, many new franchise owners start off with unrealistic financial expectations, and never achieve the level of financial success they had hoped. It’s important to understand that relying on one financial figure provides an incomplete picture of a franchise opportunity. Keep the following three tips in mind if you are a prospective franchise business owner reviewing opportunities. And please be sure to review the chart included below for average income buyiing major franchise categories. As a business owner, your take home income will ultimately come out of your business’s net profit or «bottom line.
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