The Truth About Making Money As A Franchisee

28/03/2019 08:00 | Start a business

Franchisees money

Originally uploaded on 15/01/2018. Updated on 28/03/2019.

Becoming a franchisee allows you to be your own boss without the inherent financial risk of starting an independent business. Its an exciting prospect and there are countless franchise investment opportunities available. Investors should find the ones that match their personal goals, values and budget. But many investors also want to know how much money they can make once theyve selected their preferred franchise.

The trouble is, its not a simple question. The answer depends on a range of factors, which change with every franchise system. Often, youll see misleading figures that have been exaggerated to draw in new franchisees. As a result, many entrepreneurs buy into a franchise only to close up shop when they havent made any money further down the line. So, how do you know which are the best franchises to invest in?

Ultimately, franchisees can only rely on their own research. This is why you should carry out your due diligence with each prospective investment but bear in mind that it can take time to develop a financial understanding of individual franchises. For that reason, weve highlighted common franchising misconceptions to uncover the truth about franchising. What follows are some key points about making money as a franchisee.

You Wont Take Home the Top Line

Its common to see franchises boasting about their gross sales figures. When looking at lists of the best franchises to invest in, youll probably find franchises that make a turnover of £400,000 or more in their first year. Dont allow yourself to get carried away with these figures - its not the end of the story.

The total money a company makes often referred to as the top line is not equivalent to what the franchisee takes home. Firstly, this money will cover the expenses and outgoings of the business. This could be raw materials such as food or recurring bills such as rent and electricity. Secondly, your staff salaries will also come from the top line. Finally, youll also need to use this money to pay any tax contributions or royalties owed to the franchisor. Only when all these things have been taken care of can the franchisee take his cut.

These expenses can actually cause some businesses to lose money after a busy month. In fact, some of the most profitable franchises have a low top line because their expenses are also significant. As a franchisee, the money you make will ultimately be determined by the profit margin of your franchise.

The Territory Makes a Difference

The story isnt over once youve determined the profit margin - youll also need to consider the territories available to you. Many of the best franchises already have units in desirable regions. It is the role of the franchisor to maximise the revenue potential of the brand as a whole, so it is likely that they will accept your franchise as well, but this could leave you with a smaller share of the market than you accounted for.

Of course, some territories are more profitable than others when it comes to certain franchises. For example, a hipster bar is going to be far more successful in a city centre or near student accommodation than in a pensioners residential district. Franchisors arent always aware of regional factors like this, so the franchisee should always consider their target market and the suitability of a potential territory.

When researching territories, its also worthwhile to research whether any other industries have been particularly successful there. You may find that pizza chains do very well in your chosen area, but computer support companies are constantly going out of business. Use this information to narrow down your franchise choices.

It Takes Time to Turn a Profit

Successful franchises provide its franchisees with brand recognition, established marketing campaigns and public trust. However, that doesnt mean you should expect a line of customers outside your door from day one. It always takes time to build a successful business, even if the brand is already established.

Franchisees should also allocate time to pay off any initial payments. The expenses needed to set-up the business are often the largest sums of the franchising journey. Before the business can even start making money, property, equipment and stock must be acquired and staff must be fully trained.

Investors should ensure that they have enough capital to keep the business afloat in the first few months of the business. In the meantime, well-planned local marketing campaigns can be used to boost the business visibility. Also, its important to remember that as you reach the end of your first year with the franchise, you may need to pay out another large fee to renew your license for the following year.

You Need to Have What it Takes

The mindset of the franchisee also has a huge impact on the profitability of the franchise. Regardless of the business model, the franchise will benefit from a franchisees business acumen and willingness to work hard. Building a successful franchise is never going to be an easy task; you must be savvy, determined and judicious in order for a business to work efficiently.

It is also your responsibility to ensure that the business follows the franchisors proven strategies, as well as hire qualified staff and keep them motivated. Whats more, customers will expect your franchises services to live up to those of the rest of the franchise, so you must do what it takes to uphold the business reputation in the local community.

Failure to do these things will leave any franchise susceptible to failure. If youre not ready to invest time and effort as well as money to ensure that the franchise is successful, starting a franchise may not be the right move for you. However, if youre committed to doing whatever it takes to make your business a success, there is no limit to how much money you can make as a franchisee.

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