Whether you’re a franchisor handling multiple business locations at once, or a franchisee just starting up a new unit, you want to see your new franchise come to profit as soon as possible. There are ways to build a profitable franchise a little quicker - some of which you’ll discover below.
There’s no instant shortcut to profitability. All good things take time, and sadly, this is true of building a lasting, successful franchise. Yet there are ways to potentially speed up your journey to financial success.
But what does profitability mean, exactly, and how can you build a profitable franchise in just a few years? Here’s everything you need to know.
What is a profitable franchise?
With around 48,000 UK franchise units in operation today, a 25% increase on the 2011 figure, it’s important you understand what’s required to achieve profitability, as the competition is fierce...
What does profitability mean?
Profitability, in this context, refers to whether or not a franchise is generating an overall financial profit, rather than running an overall financial loss.
How do I check if my business is profitable?
To successfully check if your business is profitable you will need to look at three key areas:
- Net profit margin - If your net profit margin is positive, you’re turning a profit. If it’s negative, you’re losing money. If your net profit margin is at zero, you’re breaking even. The higher the number, the more profit you’re racking up. Check this number on a monthly basis and compare it to previous months in order to track trends and monitor changes.
- Gross profit margin - If you’re operating a retail franchise which sells physical products, understanding your gross profit margin will tell you how profitable your products are. You’ll be able to weigh profit against production costs. A profit margin of over 50% is seen as solid, but you also need to consider sales volume, as a lot of sales can make up for a low gross profit margin.
- Operating expenses - If your revenue is increasing, but your profit is stagnant or decreasing, pay close attention to your operating expenses. It’s possible that sudden higher expenses are to blame, like unavoidable new equipment purchases or the hiring of a new employee.
>> Read more:
- 5 Qualities of a Successful Franchisor
- 5 Reasons Why A Strong Franchisor-Franchisee Relationship Is So Important
- 5 Ways to Keep on Learning as a Franchisor
- Franchisor Tips: 6 Mistakes to Avoid When Running a Franchise Network
- The 8 Primary Roles and Responsibilities of a Franchisor
- Franchisor Tips: 10 Traits That Make a Good Franchisor
- Nine Reasons Why It’s Important for Franchisors to Visit Franchisees
How long does it take for a business to become profitable?
97% of UK franchise units reported that they were profitable in 2015 [British Franchising Association], so the odds of your franchise becoming profitable in time are high. But how long will it take?
Every business is different, but the general consensus is that it takes between two to three years to build a consistently profitable franchise. You can figure out how far you are from that ideal goal by completing a break-even analysis [Forbes]. This analysis, in which a franchisor or franchisee makes educated guesses about expenses and revenue, will shed light. A break-even analysis should focus on:
- Known, fixed costs, like premises rent and employee salaries
- Your anticipated sales revenue
- Your average gross profit for each sale
- Your average gross profit percentage
Check out our previous article ‘When Will My Franchise Break Even?’ for more information.
Building a profitable franchise as a franchisor
Here are some key franchisor tips that could help you build a profitable franchise in just two years:
1. Choose the right franchisee
The importance of finding the right franchisee for your business cannot be overstated. The more invested, hard-working and competent your franchisee is, the quicker their franchise is likely to come to profit.
2. Offer support at every step
The best way to ensure speedy profitability is to ensure that your franchisee is doing the best possible job. To facilitate this, you should be offering support every step of the way, whether it’s help selecting the right location, initial training, ongoing help or general availability to answer questions.
3. Utilise franchisee ability and experience
Make franchising a positive, collaborative experience by listening to and trusting your franchisees. Use their on-the-ground experience to your benefit, and listen to their profit-increasing suggestions, rather than pushing them aside.
>> Read more:
Building a profitable franchise as a franchisee
Here are some key franchisee tips for building a profitable franchise in just two years:
1. Do your research
Do your research ahead of time, and make sure you know everything there is to know about the business. In the same vein, make sure you’re truly passionate about what you’ll be doing before you make an investment. The more you care, the harder you’ll work, and the quicker you’ll reach profit.
2. Support your team
Just as your franchisor should be supporting you, you should be supporting any employees. Demonstrate leadership, answer queries, and be there for your team members. Listen when they raise concerns, and respond promptly and efficiently.
3. Utilise franchisor ability and experience
Lean on the quality support that’s on offer to you. Ask for more training if you feel you need it, and don’t be afraid to go to your franchisor with questions or suggestions - a good franchisor will listen and collaborate.
Maintaining a profitable franchise
Once you’ve achieved profitability, it’s important to stay in the green. Here are four top tips for maintaining a profitable franchise once you reach that goal:
Follow a proven system
If things have worked - great! Continue to follow your proven system. That said, if the system starts to stagnate or fail you, don’t be afraid to mix things up to try and achieve better results. You can always return to your roots if branching out in a new direction isn’t successful.
Always make detailed and realistic plans for your future, which you evaluate and update regularly. Good preparation and organisation leads to continued success.
Hire the best people
Whether you’re a franchisor or a franchisee, don’t settle when it comes to hiring the right people for the job. Having a fantastic team around you will make life ten times easier, and effective collaboration will guarantee long-term success. Recruit carefully, and be confident in all of your team members.
If you’ve managed to hire the best people, it’s likely that you’ll be able to hand off certain jobs with confidence. Utilise the skills of those around you.
What comes next?
Once you’ve gained confidence in your profitability, and the ship is steady, it’s time to consider what comes next. What are your expansion options? As a franchisor, would you like to look into new investment proposals? As an investor, would you consider becoming a multi-unit franchisee? Think your expansion plans through carefully, but don’t be afraid to dream.
Timing is crucial when you’re considering going multiple. Getting it wrong could be disastrous.
—Euan Fraser, AMO Consulting
Making a choice to franchise can lead to profit
Franchises have one of the lowest failure rates among start-up models, at just 4.6% compared with 50% for certain independent business models [Boost Education]. If you’re looking to make a financially viable investment that allows you to become your own boss, franchising should be your next move.
Lily Sweeney, Point Franchise ©