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How do franchise companies make money

how do franchise companies make money

Making money from a franchise system is significantly different from doing so with other kinds of business. The franchisor does not earn income solely from goods or services sold by the company-owned businesses alone, but also from franchise fees and royalties from the franchises they sell to franchisees. The different financial demands and nuances of franchise systems hence require a different approach than one might take if running a traditional business offering. In this article, several aspects to generating revenue from a franchise system will be discussed and guidelines suggested for franchisors, based on advice from the franchising book Grow Smart, Risk Less by Shelly Sun. Many people who are new to the franchisor side of the franchise industry, or who are considering becoming a franchisor, might assume that the primary source of income from a franchise system comes in the form of franchise fees, i. However, many franchisors report that, contrary to this assumption, their primary source of income is rather from royalties; that is, the ongoing fees that franchisees pay to the franchisor on a regular basis, which may either be a flat rate or a percentage of turnover or profit. The actual selling of a franchise itself tends to be a loss-leader for most franchisors: the franchisor makes a short-term loss on selling a franchise business in hopes of making a long-term profit from the franchisee via royalties. Although this figure will vary substantially depending on the industry, the sector, the size of the franchise system, the market penetration of the franchisor and countless other factors, many franchisors report that it takes anywhere from 18 to 22 months to break even on a new franchise business. Obviously, the franchisor wants this figure to be as low as possible, which is why proper screening and selection of new franchisees is so important; a beginning franchisor, anxious to spread their franchise system, may accept offers from a wide how do franchise companies make money of prospective franchisees with the required capital, but this may result in long-term losses if the prospective franchisee is not qualified to run a franchise business. For any franchise system in any industry, this is what all franchisors should be striving towards at all times. Below are five key strategies to maximise royalties from franchisees, which shall be discussed in greater detail below:. For further information on how to ensure your new franchisees have as strong a start as possible, consult our article on training and on-boarding procedures for franchisees. Your goal should be to maximise franchisee unit economics, shorten the time it takes for the franchisee to break even, and minimise the time that a franchise is open without trading — every minute the franchise is open without trading is costing you money. Before signing any franchisees, you should set aside additional resources for several useful purposes:.

How to Franchise your Business, Make it Work and Make Money – A Complete Guide

Thousands of entrepreneurs take the plunge and invest in franchises as a way to grab onto the American dream. The lure is having a proven brand concept and training and marketing support to improve the odds of start-up success. But for most, the No. As part of the just-launched » America’s Star Franchisees » list, the 50 franchisees profiled across the country provided annual gross sales figures, many running into the millions of dollars. But as part of its work on the project with CNBC, Franchise Business Review also reviewed profit figures for the vast majority of «Star Franchises» and found that these franchises as a group average three times the net income of the average U. For some, the advantage was starting with a low-cost franchise and hitting the ball out of the park. Others were able to generate a high return on investment, even at a greater initial franchise investment. And remember, the franchisees on this list are rock stars, not the average. Unfortunately, many new franchise owners start off with unrealistic financial expectations, and never achieve the level of financial success they had hoped for. It’s important to understand that relying on one financial figure provides an incomplete picture of a franchise opportunity. Keep the following three tips in mind if you are a prospective franchise business owner reviewing opportunities. And please be sure to review the chart included below for average income in major franchise categories. As a business owner, your take home income will ultimately come out of your business’s net profit or «bottom line. Profitability varies from business to business, and industry to industry. How well a business is managed by the owner will have a significant impact on how profitable it ultimately is. The key is to not let big top line numbers blur your judgment. The bottom line of a business is much more important.

how do franchise companies make money

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This story appears in the January issue of. OK, so you think you’re ready to buy a franchise. You’ve done some research. You’ve weighed the pros and cons. You’ve selected a business with an interesting product. You even know what you’ll wear to work and how many hours you expect to be there. Yet in spite of how much preparation you’ve done, you still don’t know the answer to the most pressing question: Will your business make money? No franchise company—no matter how glorious its track record—can guarantee financial success. But you have a much better chance of having a winning proposition if you follow these practical pointers before you sign on the dotted line. Know thyself.

Royalty fees

I’m looking to buy into GNC, but I don’t want to invest a large amount and make very little or nothing, any advice, tips, anything is helpful. Franchisees franchise owners make money typically in the same manner an independent company makes money. The difference being the franchisee typically has to pay a monthly royalty that is a percentage, in some cases a flat fee of the gross sales back to the franchisor.

There are charts of costs in the FDD also to aid you in creating your own business plan. In addition, you can speak to franchisees of the system to determine not only their satisfaction with the brand but also their return on investment.

Once you have gathered all your data make a list of what types of activities the business requires to be successful and determine if you have the skills and desire required to execute on those activities. If you determine the answer is yes then you may want to complete your business plan by creating high, medium and lower ROI models to help make a final decision. You make money the same way any other store owner makes money — you sell enough products with enough markup to cover your costs then.

When you hear the store name GNC, you already pretty much know what it sells and there is a trust already built up, as opposed to Bob’s Nutrition Store, which might sell the same stuff, but doesn’t have the same familiarity and goodwill.

As with any venture, you have to have the right location, sell the right products. Similarly, you also don’t want to open a GNC in a neighborhood that barely makes enough money to put food on the table, never mind shell out more for supplements. Usually, the franchiser will help you with demographic studies. Just make sure you do your homework, check on the support the franchise gives you, how much the franchise fee will take out of your cash. Am afraid that it will cost you, plus it seems to me, that there is starting to be some bad press concerning vitamins.

You may want to study some of the books of other GNC’s if you are able. Or at least watch the amount of traffic that goes in and out of one for a period of time. And see how inventory they carry and the profit margin of the products Franchise owners make money the same way all business owners make money, they sell more than what it costs to run the business. With franchises, a big part of your success will be location, so make sure you’re in a good spot in the mall or something, or else no one will come to visit your store and buy vitamins.

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Most Profitable Franchises in 2019

General Income

I want you to ignore every pre-conceived notion you have about franchising for a few minutes. Be at one with the newness of it. Your business has been growing steadily since you started it, 4 years ago. On the surface, it certainly sounds like a great plan. This money would come from at least two places; franchise fees and ongoing royalties. My late father taught me something very valuable about franchise development, and it has to do with money. He said that the biggest mistake people make who want to franchise their businesses is doing it on the cheap. A perfect example of this is someone that only uses an attorney when developing their franchise how do franchise companies make money. There is so much more to franchise development than the legal requirements needed to franchise. But for some reason, most of the people I talk to are laser-focused on legalities. Ask for lots of references. You may find that some of them are a little too eager to turn your independent business into a franchise business.


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