Are you trying to decide if owning a franchise business is the best option for you?
Before you embark on your journey to becoming a franchise owner, also known as a franchisee, it’s essential to understand:
- How does a franchise make money?
- How much do franchise owners make?
- What are the most profitable franchises?
What Are the Ways Franchises Make Money?
When you enter a franchise agreement, the prospective franchisees will always expect to pay initial investment costs that vary depending on multiple factors. But is this how franchises bring in cash flow? While some franchisors may profit off these fees, the real success comes from the franchise development process of building successful franchisees.
Franchises make money from fees and other elements established in the franchise disclosure documents (FDD). These include:
- Royalty fees
- Advertising fees
- Employee training
- Franchise products and equipment
The primary source of income for a franchisor comes from the ongoing royalty fees. As part of the franchise agreement, franchisors will establish a fixed flat rate or percentage of gross sales of that franchise unit. An excellent franchisor-franchisee relationship will contribute to a successful franchise and results in increased royalty fees.
The franchise system benefits from advertising campaigns that are conducted locally, regionally, and nationally. In some cases, each franchisee will contribute to a fund established by the franchisor for advertising costs. This fund will alleviate the overall cost of the franchisor, but both parties will reap the benefits of attracting loyal customers to the franchise units.
When a small business owner opens up a franchise, they agree to follow a specific business plan set by the franchise. For franchise owners to comply with the way things need to be done, employees of the new franchise unit need proper training. Franchisors could include training fees, from which they can make a profit.
Franchise Products and Equipment
Each franchise unit isn’t only expected to operate the new business a certain way, but they also have to offer the same products. In the case of fast-food franchises, customers expect to receive the same delicious food items at any location. Franchisors could provide the products with a profit margin included in the price or earn a percentage of the cost from a specified supplier.
Each franchise unit will also need to purchase the proper equipment to provide customers with the product they expect. The costs associated with such equipment will provide a profit to the franchisor.
How Much do Franchise Owners Make?
The way that franchisors make money might seem daunting to new franchisees. The majority of the profits a franchisee earns will come from sales made by consumers that know and trust the franchise brand. How much exactly does the franchisee make? There is no specified amount in the case of any franchisee. Prospective franchisees will notice that the franchise disclosure agreement will provide a glimpse of the estimated average revenue that a franchise business owner can make.
There may be a learning curve to a franchise startup, but the success of your unit will come from the combination of the business owner’s efforts and the reputation of the brand. Other factors that can influence how much a franchise owner makes include:
- Franchisor’s business expertise. Your startup business isn’t starting from zero. Franchisors will always be willing to help any of their franchise units.
- Ability to control stock items. Since higher profits mean a higher income, it’s beneficial to your pockets to ensure adequate stock turn.
- Efforts of your workforce. The satisfaction of your customers will result in customers returning to your franchise unit. Their happiness will depend on hiring qualified employees that are willing to provide quality products and quality service.
What are the Most Profitable Franchises?
When you think about franchise businesses, what comes to mind? For many of us, franchising is associated with fast-food companies like McDonald’s, Subway, and Burger King. While food franchises typically hold the top spots in profitability, the most profitable franchises cover various industries.
The top 5 most profitable franchise businesses in 2021 are:
It most likely doesn’t come as a surprise that McDonald’s has proven to be the most profitable franchise in the last couple of years. With a brand name known globally, any new franchisee could be guaranteed success in the fast-food industry. But to have a piece of the pie, you’re looking at:
- An initial franchise fee of about $45,000
- Estimated initial franchise investment between $1 million and $2.2 million
Another fast-food franchise that has shown profitability is Dunkin’. New franchisees can take advantage of the excellent support provided by this franchise system. The brand name is recognized nationwide, making Dunkin‘ a great option. But you will be looking at:
- A minimum initial franchise fee of about $40,000
- Estimated initial investment between $96,000 to $1.5 million
The UPS Store
The franchise units in fast food aren’t the only thriving businesses. The UPS Store has solidified its place in the top 5 due to its world-class training, brand recognition, and support system for owners of new franchises. An extra perk is that they work closely with Guidant Financial, a small business lending institution that offers prospective franchisees possible financing. The upfront costs include:
- An initial franchise fee as high as $29,950
- Estimated initial franchise investment between $138,000 to $470,000
The travel industry has also proven to be profitable with Dream Vacations. This travel agency has made a mark on many world travelers offering everything they need to have the vacation of their dreams. When it comes to franchise opportunities, Dream Vacations is eager to provide franchisees discounts depending on their experience level. The low-cost investment begins with:
- An initial franchise fee anywhere between $495 to $9,800
- Estimated initial investments between $2,000 to $20,000
The Maids is another profitable and successful franchise, leading the residential cleaning industry. The brand name comes with an impressive reputation built over 40 years for leading new technology and advancements with cleaning efficiency. This franchise investment opportunity starts at an:
- Initial franchise fee of about $12,500
- Estimated initial franchise investment between $48,950 to $124,950
Your Potential Franchise
These fantastic businesses have made it clear that the franchise system yields high profitability. But prospective franchisees in some of the above companies will require a lot of money to invest.
Fortunately, the franchise model does provide many advantages, including an established brand name and effective business plans, no matter the business.
Although many startups fail within their first year, effectively performing your due diligence before opening a new business will put you on the right path to becoming a successful business.
Why Franchise wants you to be the next successful franchisee, let us help you start to reap the benefits today!