Let’s start with a basic question: How important is money to you? Most people will say that money is pretty important, and they should. Money after all can bring you comfort and freedom. But let’s face it, once you’ve got the basic essentials covered (food, housing, healthcare, clothing, etc.) more money doesn’t necessarily make you happier.
So just how much money is enough? Only you can answer that question but we’ll help you identify profitable franchise businesses that could help you build significant wealth. And we’ll also help you avoid some common mistakes as well.
We’ve been researching franchise businesses for over 15 years, and we’ve learned a thing or two about investing in a financially successful franchise. Here are five key points to keep in mind when looking for a profitable franchise business.
The most successful franchise owners are always extremely passionate about the businesses that they are growing. If you’re just chasing money, you will probably never be happy. Look for a business concept that gets you really excited. Talk with franchise owners and identify the companies with positive and professional corporate staff and passionate franchisees. Life is short. When you discover the right business – one that gets you really excited – you’ll find it easy to wake up every day to make success happen!
High owner satisfaction drives high performance—and vise versa. While there are thousands of franchise companies you could invest in, two-thirds of those franchise businesses are simply average or below-average investments. Every franchise company will tell you that they are above average. Your job is to ask them to prove it.
See the full list of Most Profitable Franchises in 2020. All franchises who made the list are best-in-class franchises based on franchisee satisfaction.
When you do your franchise research, ask companies to see their Franchisee Satisfaction Report from Franchise Business Review. We independently survey franchisees and only the highest-rated franchise companies receive our satisfaction awards. If a brand isn’t on our awards list, ask them why. Your potential success as a business owner is significantly better with an award-winning franchise brand behind you.
Chicken Salad Chick Founder, Stacy Brown
Many franchise companies will brag about their “top line” or gross sales/revenues. And while a healthy top line is important, it’s the bottom line (net income/profit) of the business that really matters. When you’re talking with franchise companies, collect as much financial information as you can to gain a solid picture of the typical gross sales of the business, common expenses, cost of goods, and profit margins. Start to put together a business plan based on realistic financial projections. Then talk with franchisees and confirm your financial estimates are “in the ballpark.”
How Much Money Can You Make in Franchising? Request our exclusive video in which our CEO, Eric Stites explains some key factors you should consider when analyzing your potential return on a franchise investment.
Business profitability varies widely from industry to industry and business owner to business owner. Even the most successful businesses commonly take a year or more to start generating meaningful profits. Many franchise companies don’t do a good job of explaining all the details of their franchise costs, and the time it can take to grow revenues and profits.
Wild Birds Unlimited is an exception. The nature retail franchise company has one of the most detailed Financial Performance Representations (FPR) in the franchise industry. FPRs (otherwise known as Item 19 of a Franchise Disclosure Document) are where franchise companies can share financial information about their franchise outlet performance.
Most companies only put high-level information in their Item 19—usually average gross sales figures from a limited group of locations. This is a starting point but gross sales figures don’t really tell you anything about business profitability. Wild Birds Unlimited, on the other hand, discloses average gross sales figures, average owner discretionary income, as well as average new store profitability over their first three years of operation.
Paul Pickett, Chief Development Officer at Wild Birds Unlimited, told us, “We spend a great deal of time educating our franchisee candidates about our store economics and the financial investment requirements. We want our franchisees to love what they do, but we also want them to be financially successful doing it!”
When talking with other franchise owners, ask how long it took for their business to ramp up and start generating profits. Be sure to budget accordingly, and have a solid cash reserve in the event that your business takes a little longer, or costs a little more to get off the ground—because it probably will.
Business ownership is a long-term investment strategy. If you’re hoping to turn a big profit in just a few years, franchising is probably not the right path. That said, many people have built significant wealth over time through owning and operating franchise businesses.
It’s also important to distinguish between income and equity. If you’re lucky enough to have a profitable business, any profits you personally take out of the business are considered income. On the other hand, equity is the long-term value of the business itself that hopefully grows over time. Many business owners build much of their wealth in the equity in their business, and cash-in on the equity when they ultimately sell the business.
As a potential new business owner, it is always a good idea to begin with the end in mind. Have a clear understanding of your investment goals and objectives. Put together a long-term plan and hire a good accountant and franchise attorney to help review your plans before investing in any franchise business. Life will always throw you a few curveballs, but having a solid, long-term plan will give you a strong foundation to build your new business on.
Terry Barker Examines the Underside of a Vehicle for Christain Brothers Automotive in Pearland, TX.
While franchising offers many great opportunities, it’s important to understand that owning and operating a successful franchise business requires a lot of hard work. Buying a franchise is not a silver bullet to overnight riches. The successful franchisees we talk with every day have all worked really hard to get to where they are.
“It’s important to have realistic expectations of what business ownership is all about,” explains Eric Stites, founder and CEO of Franchise Business Review. “Most franchise businesses—like any new business—require several years of hard work before they start to really take off. Many franchisees tell us that building their franchise business was the hardest, but most rewarding thing they’ve ever done.”
It’s important to be honest with yourself before investing in a franchise business. Are you truly passionate about the business? Are you and your family committed to at least five to ten years to build and grow a successful business? Are you really willing to put in the hard work to make your new business a success? These are the questions only you can answer.
Our selection criteria for choosing this year’s Most Profitable Franchises was very stringent. Starting with a list of nearly 300 leading franchise brands, we first eliminated franchise concepts that have a minimum startup capital requirement of over $250,000. While this eliminated many solid companies right out of the gate, including brands like Jason’s Deli, Planet Fitness, and Wendy’s, we wanted a list of highly-profitable franchise opportunities that were more financially attainable to the average franchise candidate.
Next, we looked at average franchise owner incomes from our most recent research data. While the median annual income for franchise business owners across all industries is under $100,000 per year, we wanted potential franchise investors to have a better than average shot at growing their annual income to a six-figure salary within a few years. Investing in any business comes with risks, and your financial success is never guaranteed. That said, we only selected brands that had at least 25% of their franchise owners earning annual incomes of $150,000 or higher.
Covid-19 has hit some franchise businesses harder than others - full-service restaurants and fitness businesses are just two examples. That being said, we removed a number of historically very profitable franchises that we just can’t recommend right now given the continued unknowns of the pandemic over the months ahead.
If you're looking to find a great franchise that fits your financial needs and personal needs, we think our 2020 Most Profitable Franchises list is a great place to start.
Last, we looked at franchise owner satisfaction. Our list had to include highly profitable franchises, but also organizations with outstanding franchise owner satisfaction. We know from our research that high satisfaction drives high financial performance. Strong franchisor-franchisee relations are the core of successful franchising. In the end, we settled on 35 franchises that offer both a strong financial opportunity, as well as extremely high satisfaction among their current franchise owners.
2020 has been a year many small business owners won’t soon forget. And while the pandemic caused some businesses to close temporarily or operate at greatly reduced levels, many home-based businesses continued on with limited impact.