How long will it take for your franchise to make a profit?

10/06/2018 08:00 | Start a business

How to make a profit with a franchise

If you’re concerned about how long it’s going to take your franchise to become profitable, you’re not alone. Everyone wants to know how long they’ll need, but establishing an accurate timescale is incredibly tricky. However, there are a few factors that could offer some insight. Here, we take a look at the five most influential factors and explain how they impact on the amount of time it takes your business to turn a profit.

The timescale varies

The most important thing you need to know when it comes to questions of a new franchise’s profitability is that the timeframe differs dramatically. Franchise business opportunities now exist in every type of industry. It’s only reasonable to expect a fully equipped, high-end restaurant to require a more extended breaking-in period than a van-based cleaning services franchise.

However, it's also important to recognise the fact that turning a profit in the shortest period possible isn't necessarily the most important consideration for your fledgeling franchise. Of course, all businesses eventually need to make a profit, but some take longer than others and are better off for it. What’s most important is that your new franchise unit grows and develops in a way that ensures its long-term future and profitability.

Ways you can estimate the timeline

If you're trying to determine how long it's going to take your franchise to start turning profit, there are a few questions you can ask yourself. It's important to understand that every business is different and that what takes one franchise a year, may take another franchise two or three years. There’s no guarantee that your business will begin turning a profit within a specific timescale, nor is there a guarantee that it will turn a profit at all. Consequently, franchisees need to be prepared for any eventuality and shouldn’t be overly concerned if your franchise isn’t progressing at the precise speed you expected.

1. Are you operating out of a physical store?
If your business requires a physical brick and mortar store to operate, it's going to take you considerably longer to turn a profit than a similar business without a physical store. Simply put, this is because you'll have the additional cost of the lease to account for. Rent is one of the most significant expenditures for any business and can severely impact on your net income. However, for businesses in a wide variety of industries, a physical store is essential. It's also important to take into consideration the fact that a franchise that requires a physical store will take longer to prepare for opening day.

2. Debt or equity?
Borrowing money is expensive. If you’re starting a business by borrowing, you’re putting yourself in debt. Unfortunately, debt requires servicing. By taking a loan to finance your business, you'll be required to pay back a little (plus interest) each month. This is likely to lengthen the period you can expect to operate without turning a profit. On the other hand, financing your franchise with equity puts you at a distinct advantage when it comes to quickly turning a profit. However, it's important to remember that this shouldn't be the only factor that determines how you finance your franchise. Think long and hard before you decide on what's best for your business' long-term future.

3. Is the business membership based?
In recent years, there’s emerged a growing number of membership-based franchises. These are most commonly seen in the health and wellbeing sector, where gym, fitness, and spa franchises use this model extensively. Membership based models do mean that your business will take longer to reach profitability. This is because it takes more time to convince customers to become members than it does to convince them to part with their money for a single product or service. However, this is an excellent example of how the rush to become profitable as soon as possible can backfire. Membership based business are some of the best franchises to buy – it may take longer to build a membership base, but once they’re established, there’s a much larger, guaranteed income to be had.

4. Are you the owner and manager?
To some extent, the speed with which your business becomes profitable will depend on your organisational structure. A profitable franchise is typically one that can streamline operations so that they're only spending what they have to on staff and staff management. One of the key decisions that will influence your route to profitability is whether you operate as both the owner and manager of the business. If you do, then you’ll likely reach profitability a lot sooner. If you’re hiring a manager, you’ll have to account for a relatively large salary being taken from your profit line each month.

5. Are you aiming for profit or growth?
The amount of time it takes for your franchise to become profitable will also depend on what your goals are. Do you want to make a lot of profit from the first possible moment, or do you want to put any profits you earn straight back into the business and try to grow it quickly? This decision will also be influenced by what your competitors are doing. If you find yourself in a race for market domination with a close competitor, your hand may be forced, and you'll have to reinvest your profits to expand quicker than they can. As we've said already, profit isn't the be-all and end-all of business. There are other important factors to consider, too.

If you’re overly concerned with turning a profit as quickly as possible, you may want to take a step back for a moment and consider if you're doing the right thing. It may be the case that you are. However, it may also be the case that your prioritising short-term profit over the long-term health of your business. It can be challenging to know how long a franchise will take to become profitable, but there are a few factors that will influence the process. The five factors mentioned above are some of the most important in determining how long it will take, but each franchise is unique and follows its own route.

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