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If you Google the national average income for a franchise owner in the United States, you’ll find answers ranging anywhere from $50,000 to $200,000+ per year. The real answer is that this number is largely irrelevant, as the average income varies greatly from franchise to franchise and business owner to business owner. In addition, the range doesn’t take into consideration upside income potential from a sale of the business nor the downside risk of losing the money you invest and more (which is a possibility that needs to be considered). This means that you’ll have to do your own research to make sure the brand you're interested in can meet your financial goals as well as weigh the risks associated with a franchise investment. To learn the most effective way to research franchise brands, read our guide on how to conduct due diligence.
To understand income and loss potential it is important to understand what a franchise is. In short, the purchase of a franchise provides you (The Franchisee) the rights to a business model and its trademarks for a period of time, in a defined territory, in exchange you provide the Franchisor (entity that sold you the franchise) Royalties and other fees for the term of the agreement for ongoing support. There are many other stipulations that along with a franchise agreement. But in short you are an independent business owner that is operating under another brand's marks with some training and support.
A franchise isn't passive and won't generate a return or income automatically, its a complex business transaction that involves the creation of an entity that you own and the ultimately have to operate as a normal business. It will have a P&L and most likely a large investment that is made up front that will need to be paid off with business income before you receive a return.
A large part researching a franchise opportunity is figuring out if you can operate the business effectively and whether the financial representations make sense from an operations perspective. A Franchisor cannot directly answer income questions or provide projections because frankly it is out of their control. Instead they can provide and reference data that they provide you in a standard format - called a Franchise Disclosure Document (FDD). This document discloses important nuanced information on the franchise offer. To learn more about FDD's read our guide to the Franchise Disclosure Document.
The problem is that even though a Franchise may be based on a business model that is operating successfully or generating profit / revenue for a Franchisor or other Franchisees, there is no guarantee that you will be able to replicate that or that your market can support this business. In addition, Franchisors are not required to guarantee your success (and essentially none of them do). So if you fail, you will be left with the costs incurred on a failed venture.
Due to this very real uncertainty, Franchisors cannot explicitly make earnings claims or forward-looking projections for a potential Franchisee. The Federal Trade Commission (FTC) regulates the franchise buying process, and this is probably the most important restriction they impose on Franchisors and franchise sales people.
The intention of this restriction is to protect you, the franchise buyer. franchisors can choose to provide financial representations about their business in their FDD, which is based on past financial performance of corporate and/or franchise units. It is important to note that most FDD's are updated once a year (typically before the end of April of each year) and if a franchisor decides to make a financial representation in their disclosure document it will typically show financial data from the prior year.
Even if the information shared looks great, that does not necessarily mean you as a franchisee will achieve those numbers or operate your business with the same results. At the end of the day, you are a business owner running another brand's playbook that has the potential to fail or to succeed. Buying a franchise does not guarantee that you will run a profitable business, generate the same revenue, or incur the same expenses.
It is important for you as the buyer to review a brand in a non-biased way, which is why the FTC requires that you spend at least 14 days reviewing the brand's FDD.
The FTC requires all franchisors to provide an FDD on their offering during the franchise buying process. If you do not want to talk to a franchisor but want to do your own research, FDDs can be purchased from FranchiseHelp.
In every FDD, there is a section called “Item 19” where franchisors may provide financial representations. These representations present historical financial data based on the performance of other operating locations for that franchise brand, which may include: outlet sales, costs, profits or losses.
Some brands provide full profit and loss statements for their locations while others provide less information, such as fewer revenue and expense representations or even just average revenues. Those who provide less information may not have access to all of that data from their franchise owners or choose to limit the information in their FDD.
Your job as a potential franchise owner is to take that data and build your own financial projections while talking to other professionals (franchise attorneys, accountants, and family / friends / advisors with related business experience). It is also recommended that you try to obtain financial information from current and former franchisees - you can find their names and contact information in Item 20 and Exhibits in the FDD.
In addition, you will want to refer to Items 5 and 6 to understand the fees paid to a Franchisor like Royalties, Marketing Fees, and Technology Fees, all of which will affect the potential to make returns.
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