There are many reasons to open a franchise, or a business of any kind. Unless you make your money elsewhere, the most important reason is to have an income stream. Although the many advantages of franchise ownership include having a tried-and-true business model, that won’t necessarily guarantee success. There are a lot of franchise options available for business owners; if you choose the wrong one for your location or even your expectations, you’re most likely not going to succeed.
However, if you do your due diligence, you may be able to determine, before you even get started, if a franchise is right for you — and whether it will make money. Here are some important steps to determine a franchise’s earning potential, decide if it’s the right fit for you, and help answer the question “how much can I make owning a franchise?”
Although to some extent you can choose your location based on which franchise you choose, it’s important to know whether the geographical region or area would support the kinds of franchises you’re researching. Is there a market for the franchise? Are there competitors nearby doing well in the general industry? Alternatively, are there competitors who are doing poorly, and could a franchise business model do it better? Are the types of commercial properties available conducive to the kind of franchise you want to open? If not, you may need to reconsider your choice.
Expenses and Income
To help determine if the franchise will make money, start by making a list of all potential expenses and income. Also called a blank P&L (profit and loss) statement, this document can help you get a clearer idea of how much it will cost to open and run your business. You can make educated guesses about some of these expenses, but there are a number of other resources available that can give you more concrete data, especially if you’re opening a franchise, including:
- Other Franchisees. Talk to others in the business and ask about their expenses and income. They may even give you their own profit and loss statement if you develop a strong enough rapport. It’s a good idea to ask multiple franchise owners so you get a clearer picture. If each franchisee gives you a different number for the same expense, figure out why. Once you know more about how other franchisees run their businesses and how much it costs them to do so, you can make a more informed decision on whether that franchise model is the right one for you.
- Read the Franchise Disclosure Document (FDD). All franchises have an FDD, which can provide you with additional information about the costs of opening that specific type of franchise. You can learn about royalty advertising costs, product costs, and average gross sales, among other useful pieces of information.
Once you have all the information you need to complete a profit and loss statement, you’ll be able to determine a break-even point for the business. Keep in mind, however, that business ownership comes with many advantages, which include writing off many personal expenses that are related to the business, including travel, internet, and phone costs, for example. Be sure to factor these expenses into your calculations. In fact, you may even consider giving yourself a lower salary because some of your personal expenses could be covered by the business. In turn, this can lower the business’ break-even point.
The amount of money a franchise brings in and the answer to the question “how much can I make owning a franchise?” depend on a number of factors, including how hard the owner is willing to work to make it successful. However, if you perform due diligence before you choose a franchise, you can help increase the chances of your success after you open the doors to your very own franchise.