Franchising 101: 5 Facts About Franchisee Income
Every prospective franchisee wants to know how much money they’ll make once their business is up and running. So, let’s learn more about franchisee earning potential and what affects it.
For many people, the ability to determine your own income is one of the key advantages of using the franchise model. Rather than receiving a fixed salary like an employee, franchisees have the power to increase their take-home pay. But what is the typical franchisee income and how can you change yours?
How much can you make as a franchisee?
According to Franchise Supermarket, the franchise industry contributes more than £15 billion to the UK economy, a figure which has increased by 46 percent over the last 10 years. The number of people employed in the franchise industry has risen too, by 70 percent in the same period, and now comprises more than 621,000 people.
This is clearly a profitable industry. In fact, 97 percent of the 44,000 franchise units across the UK are currently running in profitability and over half see an average turnover of more than £250,000.
These are all impressive stats. But because the industry is so vast, it’s difficult to determine the average franchisee income. Projected income figures created by different franchises show wildly different numbers. For instance:
- Finance franchise Brokerplan says that its franchisees can make between £2,000 and £50,000 per year, depending on how many hours they work. The most profitable franchise units generate a franchisee income of over £75,000 per year.
- Tutoring franchise Kumon claims that franchisees with 100-300 students can expect to earn anything from £30,000 to £100,000 per year.
As a result, we would say that the owners of profitable franchise units can expect to achieve an income of £50,000 or more per year.
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5 facts about franchisee income
One of the best things about being your own boss is the ability to increase your income. By making strategic changes to the way you work, you can significantly boost the amount of money you make. But how? Here are five key facts about franchisee income:
1. Increasing the number of hours you work will boost your franchisee salary
The amount you take home will depend on how much time you’re willing to invest in your new business. While some franchisees choose to work part-time or open a seasonal franchise in order to continue with existing commitments, the franchisees that run the most profitable businesses often work full-time.
While franchisors will offer training and support to get you up to speed when you first join, you’ll probably need to put in some extra hours too. Don’t forget, it’s hard work to get a business off the ground – even if you can rely on a proven business model and pre-made brand identity.
As time goes on, the more time you dedicate to your business, the more profitable it is likely to be and the more money will end up in your pocket. So, if you want to boost your income, take the time to regularly think about how you can drive more sales, appeal to more customers or develop the business in other ways.
2. Making the most of your skills and experience can help you maximise profit
If you join a franchise that belongs to a sector you're unfamiliar with, you'll spend a lot of time getting to grips with the industry, the franchise’s business model and your target market. So, save time by opting for a sector you’ve already worked in. Use your knowledge and skills to fast track your way through the set-up process and get to your break-even point faster than you otherwise would.
Not only should you be able to turn a profit quicker, but you may even be able to boost your paycheque. The franchisor will give you the option to complete a training scheme. But, if you have specialist knowledge and expertise above that which is taught to other investors, you will be able to maximise your income.
3. Looking at your franchisor’s financial projections will give you a better idea of your earning potential
Usually, franchisors will publish the potential earnings of new investors, based on existing franchisees’ incomes. These projections should be as accurate as possible and must be based on the earnings of a franchise with similar characteristics to the one being proposed to a new franchisee.
Naturally, the franchisor might opt to publicise the income of its most profitable franchises in order to attract investors. As a result, it’s a good idea to ask an accountant to scrutinise any financial projections and find out just how achievable they are.
Ideally, the business plan you write at the start of your franchise journey should forecast profitability within one or two years. This should be plenty of time to get the business off the ground but, of course, the exact timeframe will depend on the size of the franchise and the sector it operates in.
If you’re not satisfied with the projections or your accountant thinks they’re inaccurate, you can secure better future earnings by walking away and choosing a franchise with more impressive statistics.
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4. Overheads have a huge impact on the franchisee salary you take home
This may sound like an obvious one, but it’s important to keep in mind. When opening a franchise, you’re likely to see outgoings in the form of:
- Interest on business loans
- Employee salaries
These will make a dent in any profits you earn. Your prices should be high enough to maximise your return on investment but low enough to encourage custom. Striking this balance is key, so do your due diligence to make sure you’re investing in a franchise that has:
a. Created a good pricing structure
b. Considered ways to minimise overheads e.g. allowing franchisees to work from home
Bear in mind that low-cost franchises can generate a profit with a low number of sales, while more expensive ones in prime locations will only break even after a much higher volume of sales. When choosing which franchise you join, be sure to look at their investment requirements, ongoing costs and pricing structure. Make sure the combination has the potential to give you the income you’re after.
5. Franchise fees are a key indicator of your future profitability
There are two types of franchise royalty fees demanded by the franchisor:
- Fixed fee
- Percentage of the business’ sales
Of course, if the profitability of your franchise unit falls, you may struggle to pay a fixed franchise fee. But if it goes up, you’ll pay a relatively small fee. On the other hand, if the same franchise sent a percentage of its sales to the franchisor, the amount required would decrease in line with the overall franchise profit. Therefore, paying a percentage-based fee can be less risky for franchisees than agreeing to a fixed fee – unless, of course, you’re confident your business will be highly profitable.
The percentage-based fee is also beneficial because it incentivises the franchisor to provide more training and support to help the business become profitable – the higher the profits, the more money the franchisor will earn. In reality, the majority of franchisors choose this option, charging an average of 11.7 percent of sales, according to the British Franchise Association (BFA).
So, if you pay royalties as a percentage of your sales, it’s likely you’ll receive high-quality training and support too. This, in turn, will help you achieve a higher income. If you want to maximise your profitability, take the time to carefully consider your preferred franchise fee structure and select your franchise accordingly.
Understanding franchisee income
We’ve run through some of the key facts about franchisee income, but if you want to find out more, click here to read The Truth About Making Money as a Franchisee.
Alice Tuffery, Point Franchise ©
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