How Much Profit do Franchises Really Make?
Feb 14, 2023
Many people think that if you get a franchise, you can become rich. But investing in a franchise has nothing to do with the profit you can produce over what an independent business can produce.
- Yes, there are certain advantages. But in general terms, the franchise is still a business.
That means that how much profit franchises make doesn’t depend on the model itself, but on your understanding of the business financials and the application of certain business principles.
The good news is that you can increase your chances of getting a profit by following these rules.
Know what’s the break-even point of your business
The break-even point is the number of sales or revenue that you must have to cover the business cost and have no loss, but also no profit.
Franchises have a financial advantage: the model in which you get revenue is consistent. Therefore, once you figure out the processes and procedures needed to get to that break-even point, if you maintain and do a really good job with them, you’ll be able to make a profit.
Independent business owners take longer to resolve their unit economics and while trying to increase revenue, they might make changes to their business model and value proposition. And almost every time they try something new, they affect their financial model.
- Franchisees must follow systems. By doing so, it’s easier for them to understand what it takes to make a profit; therefore, they are more likely to have profitability.
That's the first step when it comes to making a profit out of your business. You require a stable and proven model and consistently execute it to have utilities.
Check that your expenses are less than your costs
Every business model has expenses, such as rent, labor costs, inventory, or the products you use to provide a service, furniture, or maintenance.
To make a profit, your expenses must be less than the cost of operating. The formula is:
Sales - Expenses = Profit
The result can also be “No profit” or “Break-even”. That’s why you need to monitor that the expenses are always less than the revenue so that you can have profitability.
That is true whether you are in a franchise model or an independent business model.
Control expenses and keep waste low
Business owners and franchisees have to know how to control their expenses and keep waste at a minimum level to maximize profits.
- When you are in a franchise model, the franchisor guides what to do to become profitable.
But here’s where the trick comes in. If you are an independent business owner, every time you modify your business model, your chances of profitability increase or decrease, depending on the decisions applied.
That's something you need to know if you are considering whether to open a business by yourself or purchase a franchise.
Recognize the biggest expenses in your business
The biggest expenses in any business are rent, labor costs, and cost of goods (GOGs), especially if you are in a brick-and-mortar business.
As you’ve heard, all of those expenses are up. The rents are up. Labor costs are up which leads to staffing challenges. And many disruptions are happening with the supply chain, so the prices are also going up.
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To sum up the last couple of tips, you need to know what are your expenses, understand them and control them, so that you can minimize waste and maximize your profitability.
If you have 100% clarity of this, you’ll be able to take the necessary actions to reduce the costs and maximize your profitability.
Beware of the little expenses
While rent, labor costs, and cost of goods are the biggest expenses in your business, hundreds of little expenses can also make you go broke.
You cannot control rent, only negotiate it, so this is a fixed number. But your labor costs and your COGs are under your control. Whether you have a unit manager that manages the business for you, or you do it yourself, this position controls both concepts to a certain extent.
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But no matter how good a job you do, there are hundreds of other expenses that, little by little, can take away your profits if you don’t manage them.
As a business owner, you need to understand your financials and your expenses, as well as what you and your leadership team need to do to keep them under control.
Know your average profit
The average profit of a business depends on many factors.
In a retail brick-and-mortar small business, franchise or independent model, led and managed by an owner who understands the break-even, the costs, the waste, how to control them, how to lead people, and all the actions they need to take, the average profit is about 8 to 10% of sales.
That is what they call net profit. That is not take-home profit, and you must understand that. That is basically:
Revenue - Expenses = Net profit
That means that if on average your unit annually makes $1,000,000 of revenue, your profit is $80,000 to $100,000 for that unit. But from that, you still have to pay taxes and, if you have a loan, pay it and its interest.
After the payments and deductions, the average business ends up with about 3 to 4% of the total sales as take-home cash. That means that from the $1,000,000, you truly take home $30,000 to $40,000 a year, which is basically, a job.
- The beautiful thing about franchising is that you can duplicate that model and open a second unit.
That means taking $80,000 a year, assuming you have a loan in both locations. And then you can open a third location, which will give you $120,000 a year. And if you open a fourth unit, you can grow to $260,000 a year.
In franchising, you are in total control of your income by the number of units that you grow!
You can also learn from the consistent execution of the operations of the brand’s product, service, and image, and duplicate that into the management systems that allow you to grow into multiple units.
I guess you could say that you can make more profit in franchising because the model and the learning you acquire in that experience allow you to grow into multi-units and duplicate, triple, or quadruple your profits. That is what makes a difference.
I have a franchise client that went from zero units to 17 in one year. Imagine having the profits of one unit grow 17x in one year!
That is the magic of profit when it comes to franchising, because:
- You have a stable model of revenue that you can operate and execute daily.
- If you become an excellent manager and have business acumen, you can squeeze the profit out of the unit.
- Then, you’ll be able to duplicate and scale your business.
If for some reason you didn’t understand what I shared in this blog post, or maybe you don’t know these financial concepts with a high level of detail, I urge you to get yourself educated because how much knowledge you have will define the profitability that you make.
There are several options to achieve this. You can find a mentor, either a successful entrepreneur or franchisee that is knowledgeable and who can share best business practices with you.
You can attend a school to learn how to manage a small business, although a lot of what they give is theory and not practical information.
Perhaps you can hire a business coach, someone who understands your business and the franchise model and can give you the knowledge and tools you need to be a successful business owner.
Another option is to join us here at The American Franchise Academy. This is what we do every day: we teach franchisees and business owners the management systems they need to be successful, maximize the profitability out of each unit, lead their teams with confidence, and multiply their units, profits, and success.
If you want to learn more about our programs, in our next information session you can know what we cover and how much you and your business can benefit.
- Register for free at www.Multiunitsucess.com
I hope this was of value to you, and that it made you think about your business, what you do know, what you don't know, and what next steps you should take. Because this knowledge is what's going to bring you where you want and deserve to be.
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Reflections:
- Are you clear about the profit goal you want to achieve?
- Do you know how to calculate your break-even point?
- How are you controlling your expenses and increasing your sales?
- Are you able to duplicate and scale your business?
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