What’s the Average Franchise Profit Percent You Can Make?

Franchisees often compare their unit’s performance with others within the franchise network and the industry to know where they are versus where they should be and if they are reaching the average franchise profit percent in the market. This comparison may help them determine how to scale their organizations.

But is there an average profit that franchise investors can expect? What needs to happen to achieve that, considering that not everybody does? That’s what we are going to uncover in this blog post.

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The average franchise profit percent will depend largely on your average sales, which can vary anywhere between 400,000 to 1.4 thousand a year for the traditional brick-and-mortar franchises. How much you achieve will be determined by the type of franchise you have.

Let me point out that I’m referring to the EBITA profits, which refers to the Earnings Before Interest, Taxes, Depreciation, and Amortization. The average EBIDTA profit is between 8%-15% of sales. If the volume of sales is low, the percentage will be lower. Contrary to this, the higher the volume, the higher the percentage.

Do you know what are the three most important numbers of your business? Read this blog post to find out and start monitoring them.

How to achieve the maximum franchise profit

The profit variation will be based on two things: the franchise business model and your understanding of it, as well as your management skills and systems. Let’s review how each of them influences so you know how to obtain maximum profitability and success:

1. Having a deep understanding of the business model

You have to comprehend how the business works and all the intricacies of revenue, customer desires, and expectations. That's something that the franchisor will give you through their training process.

You also have to consider the expenses that come with operating that brand and how they affect profitability. Let's imagine that you are analyzing two potential franchise brands, both of them promise to sell one million dollars a year. However, one of them requires a prime location with drive-thru space and parking, which means a much more expensive investment in real estate or higher rent. The other one, instead, can be installed in a shopping center or a location with a lower rent.

Even though they are both bringing in a million dollars, the costs associated are completely different. Therefore, the one that has a higher cost will have a lower profit, and the one that has a lower rent will bring more profit.

Another thing that influences the profitability of a franchise business is the necessary labor to operate that model. If it requires a lot of people, that would mean that the labor cost is going to be higher than a simpler business that requires less personnel.

If you have a high level of expertise in operations, product or service, and image, and you deeply understand how everything works, you’ll be able to achieve the maximum amount of revenue or sales for your business.

Learn some advice from successful multi-unit franchisees to deal with the staffing crisis on this blog on how to protect your eroding bottom line.

 

2. Excellent management systems and expertise

The second variation that determines how much profit you can make is your management expertise as a franchise owner. And here’s an important warning: just because you buy a franchise, it doesn't mean that you're going to make a profit.

I know many franchisees that have great brands and make no profit. Some of them even lost money because they didn't have the required management knowledge to make the money out of that brand. They invested, but they couldn’t put their money to work, and they couldn’t grow their business.

How can you avoid that? You need to acquire the skills to manage the business, control expenses, and reduce waste. If you can do that, you’ll be able to maximize the profit out of the business.

Another important warning: when you buy a franchise, franchisors give you the brand systems you need to duplicate that particular brand but they don’t provide you any type of management guidance. That’s up to you to learn.

You don’t have those types of skills? The American Franchise Academy can help you! Review our guided programs to help you become a successful franchisee.  

Don’t lose profits!

Imagine you have a franchise business that averages 500,000 dollars a year in revenue and that the average profitability EBIDTA is 10%, meaning 50,000 a year of income. However, that 10% can quickly turn into 7%.

If you do not have a deep understanding of the model and how to schedule labor, you can lose 2% of the profit. On top of that, if you don't have the proper management systems leading the way, you won’t be able to ensure the business viability, and you can lose another 1%. So, instead of reaching those 50,000 in income, you only get 35,000 dollars a year.

Imagine what it would look like if your business were supposed to make a million dollars with an average EBITDA profit of 10%. But because of labor, not understanding the model, and not having the right management systems in place, instead of 100,000 dollars, you lower your earnings to 70,000… You can lose 30,000 dollars a year!

It’s difficult to say what your franchise profit should be because this depends on the model that you get, the sales volume, and the revenue. But also, on your understanding of the business and the management systems you apply to your operation. That’s why franchisors won’t guarantee any type of profitability; they can't control how much knowledge you have or how professional your management systems are.

If you're not quite sure how to implement the management system in your business so that you can get that extra profitability out of your franchise, contact us so we can help you become a successful franchisee!

Reflections:

• Do you know the average EBITDA profit of your franchise?
• How deep is your knowledge and understanding of your business model?
• Do you have strong management skills, or do you need to strengthen them?
• Does your business have disciplined management systems, or are your operations improvised?

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