The number one question any potential franchisee wants to know is “How much money can I make as a franchise owner?” The quick answer is, if you’re lucky, you might get rich. Alternatively, you might lose your entire investment. The reality for most franchisees is somewhere in between.
Exactly how much money YOU will make as a franchise owner is a difficult question to answer. There are many factors that will influence your potential earnings. The biggest are the brand you invest in and your own personal performance as a business owner.
The 80/20 Rule
It’s true that some people in franchising—we’ll call them the top performers—have done very well for themselves. These are most often the people who end up owning multiple franchise locations and have built a successful team of people around them. This group represents only about 20 percent of the franchisee universe, yet it’s their success stories that attract thousands of people to franchising every year.
So what about the other 80 percent? For this example, we’ll look at the food and beverage sector. Note that earnings, costs, and profitability will fluctuate by sector. Our research shows that 41 percent of food franchise owners earn less than $50,000 per year, and just 15 percent—the “top performers”—earn more than $250,000 per year.
The average annual income reported by all food and beverage operators we surveyed is $130,000 for businesses open at least two years. Not bad, until you factor in the long hours and high initial investment that come with many food businesses. The good news is that our top food franchises report average earnings 25 percent higher on average than their competitors.
While aggregate income data like this can be an interesting starting point, note that average numbers can be misleading. Average income data includes all franchisees together—both single and multi-unit owners—as well as franchisees that have been operating for many years. Those “top performers” in every brand can dramatically inflate the averages.
Predicting Franchise Profitability with Median Income Data
In most cases, median income data can be much more useful, and more accurately predict how much a typical franchise owner makes. In the case of our food and beverage franchisee data, the median annual income is around $118,000. But for many startup franchisees (those in business for less than two years) it can take two years or more to see any significant income.
When doing your research and business planning, it is also important to distinguish between “business profit” and “owner income.” Prospective franchisees often confuse a business’s profits with their potential annual income/salary, which is a big mistake.
As a business owner, before you can “pay yourself,” you often have to pay business taxes, debt repayments on loans, and reinvest in your business. For example, that new piece of equipment you need, or the new signage you’re required to buy. While your business may grow to be quite profitable, your actual take-home income could be substantially lower.
Researching Franchising Opportunities
Here are some things to keep in mind when researching franchise opportunities:
- Talk with as many franchisees as you can and confirm that your business projections and income expectations are realistic.
- Understand that most business owners can’t take any money out of the business for the first few years during the startup phase. It may take even longer to start paying yourself a salary.
- Plan accordingly and try to have alternative sources of income (i.e. a spouse’s salary) to live off of while your new business is getting off the ground.
How Much Franchise Owners Make: Income and Profitability
Finally, while many food franchises report relatively high unit-level sales, and/or profitability, it’s important to look at the whole picture when considering a franchise investment.
For example, a food franchise may offer slightly higher profitability compared to other businesses. But, if the initial investment is three times higher, your overall return on investment is potentially going to be significantly lower.
Work through your long-term financial projections with a good accountant, and compare your potential franchise investment to other businesses and other investment opportunities (i.e. real estate, stocks, etc.) to see how they compare.
The Importance of the FDD
The importance of a new franchisee being well-capitalized cannot be overstated. Prospective franchisees should carefully review a brand’s Franchise Disclosure Document (FDD) and ask current franchisees how much they recommend a new franchisee have in the bank before opening.
Food and beverage franchise operators often tell us that one of the biggest issues new franchisees run into is managing the wild cash flow swings associated with operating a new business.
Many franchisors include an Item 19—the “financial performance representation”—as part of their FDD. Some provide both gross and net numbers in their Item 19 to give candidates and franchisees a better idea of potential profitability, not just top-line revenue.
Find a Franchise Opportunity That’s Right for You
If you’re comfortable in your ability to fund a food franchise and are interested in exploring the options, there are tons of opportunities. Not all opportunities are great opportunities, however. That’s why Franchise Business Review surveys thousands of franchisees every year to determine the top brands based solely on feedback collected directly from franchisees. Visit our list of the year’s Top Franchises to see the top-ranked brands based solely on franchisee satisfaction.
