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So, you’re looking for a new opportunity, where you can be your own boss while also benefiting from an established brand’s reputation and customer base? At Franchise Opportunities, we’re here to help you understand everything you need to know, as far as how to start a franchise goes.
Franchising presents an exciting means to chart the course of your own American Dream—but can owning franchises make you rich?
The quick answer can certainly be “yes,” but we imagine you have a lot of specific questions about starting your own franchise and whether it’s a wise investment. When it comes to whether starting a franchise is worth it, potential profit margins are a key consideration.
What, exactly, does “profit margin” mean? The term usually refers to net profit margin, “a company’s bottom line after all other expenses, including taxes and one-off oddities, have been taken out of revenue.” It’s a common profitability ratio that offers quick insight into a company’s overall profitability.
In this blog, we’ll be covering the topic of franchise profit margins from a few different angles, by:
Franchise ownership comes with a number of benefits, like being your own boss—but there are also disadvantages to consider. We don’t call them “disadvantages” to scare you off. Rather, it’s to be fully transparent so you can make the best decisions for your future. Let’s be honest, really answering the question of “Is it worth it?” should weigh all that you are investing (money, sure, but also time and energy) against all you are getting back. Let’s look at these benefits and disadvantages, briefly, before getting into the finer details of profit margins.
The key advantages of operating a franchise are relatively well-known. By franchising, you assume the position of being your own boss. At the same time, though, you stand to benefit from an established customer base and brand awareness, as well as business support from the franchisor organization.
Through these and other advantages, franchisees can generally expect a lower level of risk—and lower rate of failure—than starting a brand new business from scratch.
Despite the advantages listed above, having anxiety about buying a franchise is completely understandable. It’s a major transaction and a life-changing experience—and the stakes are high. Some of the potential disadvantages include certain regulations, costs, and (in rare cases) the potential for conflict.
Learn more about the advantages and disadvantages in more depth in our Ultimate Guide of How to Start a Franchise.
This is the million-dollar question, isn’t it? You’ve considered the advantages and disadvantages of franchising, and you’ve maybe even started browsing for franchises in the industry or industries that appeal to you, so let’s discuss franchise profitability for a moment.
First, it’s important to distinguish between income/revenue and profit. While it may be obvious to you that profit equals revenue minus expenses, the exact factors that impact each franchise opportunity’s profitability can vary widely. (We mentioned some of the potential expenses in the “Costs” bullet above.)
Ultimately, you may be better-served asking the question, “What franchise has the best return on investment?” This is especially important if you consider time, energy, and effort as part of your investment (as you should!). With those factors considered, “How much profit does a franchise owner make?” is another worthwhile question. While average values don’t exactly tell the whole story, studies put the average annual income for franchise owners to be around $80,000. That figure, of course, does not necessarily account for the expenses that take away from gross income figures.
There are a couple different ways to know if a franchise opportunity is likely to be profitable.
Perhaps the most straightforward way is by examining its Franchise Disclosure Document (FDD). Provided to a potential franchisee as part of the pre-sale due diligence process, this document is meant to provide the type of information needed to assess whether it’s going to be a positive investment or not.
This legally-required disclosure is made up of 23 distinct sections covering virtually every aspect of the franchisor organization and its history, as well as operational expectations for the franchisee. If you’re not sure what some of the FDD’s contents mean, you can always consult an accountant or lawyer to help you understand the FDD and its implications.
In addition to examining the FDD, a curious would-be franchisee can do some of their own research.
…So, Is Buying a Franchise Worth It?
At the end of the day, whether buying a franchise is going to be worth it to you, the franchisee, comes down to more than just the FDD’s contents and projected revenue. Determining whether a franchise will be profitable is a matter of due diligence—just like any investment. When it comes to franchising, due diligence includes balancing financial data with less-quantifiable factors like work-life balance. It also involves weighing not only the upfront costs, but the ongoing investment as well—and considering your own financial picture (present and future).
Especially if you’ve never run your own business or franchise before, you’ll want to do as much research as you can into the ins and outs of running a successful franchise. This way, you can better determine what kind of return on investment you can expect for your time, energy, and effort.
You might assume that the most profitable franchises to own are the biggest names—the McDonald’s and Starbucks tier of companies—but that’s not necessarily the case.
Taco Bell topped Franchise 500’s 2021 rankings of the most profitable franchises to own. One reason for their dominance today is that they’ve been franchising for nearly 6 decades now, with over 7,500 locations in operation today. Taco Bell also benefits from low initial franchising fees, which at least partially explains how it’s become one of 2022’s fastest-growing franchises.
Elsewhere, a recent study by NerdWallet found that the most profitable franchises to own also include highly recognizable names like McDonald’s, Dunkin’, and the UPS store. The rest of their ten most profitable franchises list includes less-predictable names: Dream Vacations, The Maids, Anytime Fitness, Pearle Vision, JAN-PRO, Supercuts, and Ace Hardware.
The coexistence of giants like McDonald’s with relatively lesser-knowns like JAN-PRO goes to show that a brand doesn’t have to represent the biggest franchise in the world to present a lucrative opportunity. All things considered, then, which is the best franchise to buy—and how do you know?
While common-sense might tell you that low cost franchises with high profit potential represent the best opportunities, that’s largely a generalization. As we’ve hopefully made pretty clear by this point, the question of franchising’s profitability doesn’t have an easy or black-and-white answer. With that in mind, then, if we were to give one single tip for addressing this question, it would be to ask the right questions of the franchisor. This is the best way to truly understand what kind of ROI or profit margin you can expect, and, just as importantly, what you can expect from day to day as the franchisee.
If you’re just beginning your search for the right franchise to buy into, do yourself a favor and bookmark FranchiseOpportunities.com now. It’s your hub for finding the best franchises within your price range and geographical area. This can be especially useful in identifying low-cost franchise opportunities in your area. When you can zero in on the highest-grossing franchises within the investment level you can take on, you put yourself in the best position to succeed.
Searching is easy! First, use the three drop-down menus to make a few selections to filter franchise opportunities by industry, location, and investment amount. This way, whether you’re looking to buy a restaurant franchise in Indiana with $30,000 to invest or a health and fitness franchise in Minnesota with less than $10,000 to invest, you can immediately narrow your search.
If you’re less certain about what kind of franchise you want to get into, you can also browse easily. Within the website’s top/header menu, you can start by selecting a specific industry, location, or investment amount, and then filter results from there.
You can also browse our own list of the best franchises to own in 2022, which includes wide representation across different industries, locations, and investment amounts.
When you select a specific franchising opportunity, you can review a wealth of helpful information about the franchise, including:
For more general information about topics like financing a franchise purchase, franchise buying guides, net worth calculators, and more, visit our Resources page.
Once you’ve found one or more franchises you’d be interested in, it’s time to get into the nitty gritty details. General questions, like those we’ve posed and attempted to answer throughout this guide to franchising, yield general answers. As such, these questions—like “What were last quarter’s profits” or “Is this a growing company?”—can be informative, but asking the right follow-up questions (as part of due diligence) is the best way to uncover real, specific answers. The International Franchise Association has put together a great resource listing examples of the types of questions you’ll want to ask.
For example, when it comes to cost, you might ask a particular franchisor about the cost of buying into a franchise. In this example, the franchisor might point to a low franchising fee, which on the surface sounds exciting. Rather than considering this one isolated point, ask about the related costs for better context. If the royalty fees drive the total investment way up, for example, then that low franchising fee becomes less advantageous.
Similarly, you can investigate the franchise’s brand strength in order to determine just how impactful you can expect the benefit of “brand recognition” to be. Every franchise has some level of brand recognition, but that doesn’t always mean McDonald’s-level recognition, or even close. In addition to how known a brand is, try to also determine how financially stable that brand is. You can gain a lot of insight into this via the company’s FDD.
Finally, what will the working relationship be? Just because you get to “be your own boss” as a franchisee, that doesn’t mean you operate in a vacuum with absolute free reign to do everything your way. Franchise models are successful when they strike the right balance between a franchisee’s autonomy and the larger consideration of creating a consistent brand experience across all locations.
At FranchiseOpportunities.com, we want to empower anyone who’s considering franchising with the information and resources they need not just to purchase a franchise, but to thrive as a franchisee.
That’s why we’ve put together a wealth of material around how to become a franchise owner. From our home page, you can browse opportunities, read in-depth resources, and then reach out with any questions you still have. Or, sign up for our newsletter if you’re not quite ready to pull the trigger yet but want to be kept in the loop.
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