Franchises are a form of investment for many looking to diversify their portfolio. However, it’s not for everyone. Unlike other investments that rise and fall without any control, opening a franchise requires work, employees, and a good eye for spotting a good franchising venture and a good location for it.
Franchising comes with its own advantages, but it’s important for potential franchise owners to know what they’re getting into before they invest. Here’s what you need to know: from how much do franchise owners make, to buying a franchise, to some of the most profitable franchises you can invest in today.
How Much Do Franchise Owners Make?
The average franchise owner in the United States makes around $75,000 to $125,000 a year. That’s definitely much more than the average salary of a college undergraduate with less than five years of experience, or around $50,000. However, don’t expect to make around that figure instantly.
Depending on a lot of factors like the profitability of the franchise, your location, and the demand for your product or service, you could make more or less than the average range. According to The Franchise Investigator, around 30 percent of franchise owners make more than $150,000.
Are All Franchise Owners Successful?
These numbers may look great, but don’t let it fool you: not all franchises are a success. Franchise opportunities may try to paint franchises as easy money or the chance to become your own boss, but according to Sean Kelly of UnhappyFranchisee.com, some franchises have up to a 90% failure rate – but these franchises are unlikely to tell you that.
In truth, opening a franchise has the same success rate as opening a small business. And just how successful are small businesses, you may ask? Well, for every hundred small businesses, only 80 will survive their first year, 28 will reach their fifth year, and only eight or nine will survive the first decade of operations.
Like any investment, franchises are a risk. So, despite all the power words and fluff franchises use to attract potential franchisees, it’s always important to do your research before putting money into this venture.
Costs of Starting a Franchise
- Franchising Fee & Royalties – The franchising fee is what franchise owners pay to the franchise to have the right to sell under the franchise’s name, use the brand and trademarked items, and more. Royalties are a percentage of the gross sales paid to the franchise as a cut from the profits after the business begins operations.
- On-hand liquid cash – Franchises may require their franchisees to have a certain net worth or on-hand cash that can be liquidated before they can be approved to open a franchise.
- Equipment and supplies – Depending on the type of franchise, you may be required to buy certain items from specific sellers even if there are cheaper alternatives in the market.
- Rent/buy commercial space – Some franchises will only approve franchisees who already have a potential commercial space to establish their business, while other franchises can help find a location.
- Remodeling – The cost of having commercial space remodeled to meet the franchise’s standards.
- Insurance – Some franchises require insurance. But in most cases, insurance is required because most franchisees take out loans from banks to buy franchises, and insurance is a common requirement for loan approval.
- Advertising – You can advertise at a local level for your franchise. You may also be required to pay a percentage of your gross sales for the larger scale advertising the franchise provides.
Advantages of Franchising
By choosing to franchise instead of opening an independent business or any form of investment, you could get the following advantages.
Skipping the Business Plan
Small businesses are required to come up with a business plan, do market research, come up with a viable product or service, and then market their relatively unknown product or service to their network. Buying a franchise skips all these steps because you’re starting a business that’s already established.
Brand Recognition
It’s easy for independent small businesses to get stuck in a sea of other small businesses that are relatively unknown. If you start an independent fast food restaurant, it will take time and lots of advertising to get it established in your area. But if you franchise a Subway, you’re operating a brand everyone already knows.
Tried and Tested Operations
Franchisors train their franchisees and their employees according to their standard operating procedures. There’s no question whether or not the process is good because it has already been successful in previous establishments.
Marketing & Advertising
While franchisees have to do their own marketing and advertising on a local scale, they can bank on the nationwide advertising the main franchisors do. This may come at a cost to some, depending on the franchise you choose to invest in.
Drawbacks of Franchising
That’s not to say that franchising is easy and has no drawbacks. Expect that these drawbacks can turn away investors and those choosing between franchising or starting your own business, including:
Required to Conform to Franchise Standards
Contrary to what some franchise opportunities tell you, you will not be “your own boss” or have creative freedom. Though you’ll have some autonomy, for the most part, your business has to follow rules, operations, and standards set by the franchise. You’ll also be required to sign a Franchise Disclosure Agreement that states what your business can and can’t do.
High Startup Costs
When you’re an independent business, you have the option to buy supplies and equipment from any supplier, and maybe buy them cheaply. But for a franchise, aside from the franchise fee, you may be required to buy the equipment and supplies from the franchisor usually for much higher prices than other suppliers,
Royalties
Royalties are separate from the franchise fee and will be collected when you start operations. This means that even when your business can operate independently, you will be required to pay a certain portion of your gross sales to the franchise, which could eat your own profit.
Reputation Management
What happens to one corporate-owned or franchised restaurant will affect the rest of the stores. For example, if one fast food restaurant franchise is found to have a rat infestation due to poor hygiene practices, consumers may think the same level of hygiene applies to all franchises.
Most Profitable Franchises to Invest in the US
Take note that this list is subject to change over time. There’s also no guarantee that these franchises are a sure success should you decide to invest. But based on the numbers, these are the franchises that can rake in the most profit:
- McDonald’s
- Franchise fee: $45,000
- Estimated total initial investment: starts at $1 million
- Dunkin’
- Franchise fee: starts at $40,000
- Estimated total initial investment: starts at $95,700
- The UPS Store
- Franchise fee: starts at $9,950
- Estimated total initial investment: starts at $138,000
- Must have at least $60,000 in liquid assets
- Anytime Fitness
- Franchise fee: starts at $3,150
- Estimated total initial investment: starts at $58,000
- Supercuts
- Franchise fee: $39,500
- Estimated total initial investment: starts at $151,000
Investing in these franchises do not necessarily mean your venture will be successful. As much as possible, do extensive research on the franchise, the area you want to establish your business, and any competitors or weaknesses your business will have. If you’re feeling a little lost, you can ask a franchise consultant to help you see if your venture is feasible.
Should I Franchise?
Despite the risks of buying a franchise, it’s still a good option for those looking at business as a good long-term investment. But it’s important to be financially savvy and see if opening a franchise is the smart move for what you have planned.
Franchisors may convince you that opening a franchise is easy money and can lead to high income, but it’s important to have all the cards on the table in order to make a financially smart decision.
If you have little to no experience with franchising, your best solution is to hire a franchise consultant to help you wade through your first deal. After all, entering a franchise investment without any knowledge of it is just as bad as making any type of investment without doing your research.
And that can put your investment and the money you put in at a huge risk.
