What factors influence the profitability of a franchise?
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One of the most obvious factors that affect your franchise profitability is the initial franchise fee and the ongoing royalty payments that you have to pay to the franchisor. The franchise fee is a one-time payment that grants you the right to use the franchisor's brand, system, and support. The royalty is a percentage of your gross sales that you have to pay monthly or quarterly to the franchisor for the continued use of their resources and services. These fees can vary widely depending on the type, size, and reputation of the franchise. You should compare the fees and royalties of different franchises and see how they match with the expected revenue and profit margins of the business.
Another important factor that influences your franchise profitability is the location and market of your franchise. The location determines the visibility, accessibility, and customer traffic of your franchise, as well as the rent, utilities, and taxes that you have to pay. The market determines the demand, competition, and pricing of your products or services, as well as the demographics, preferences, and trends of your potential customers. Research the location and market of your franchise carefully and choose a site that has high potential and low risk. You should also consider the territorial rights and restrictions that the franchisor may impose on your franchise.
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In my experience, one also has to consider the identity of the community they operate in. The most successful franchisees I have supported are the ones who understand how to become part of the community they operate in, among other factors.
Operations include the quality, efficiency, and consistency of your products or services, as well as the customer service, marketing, and management of your franchise. The expenses include the cost of goods sold, labor, supplies, equipment, maintenance, and other overheads that you have to incur to run your franchise. Optimize your operations and expenses to maximize your customer satisfaction, retention, and loyalty, as well as to minimize your waste, errors, and losses. Be sure to follow the franchisor's standards and guidelines to ensure compliance and quality control.
Support and training include the initial and ongoing assistance, guidance, and resources that the franchisor provides to you to help you start and grow your franchise. Support and training can cover various aspects of your franchise, such as site selection, financing, legal, accounting, marketing, technology, operations, and human resources. You should evaluate the support and training that the franchisor offers and see how they match with your needs. You should also take advantage of the franchisor's network and community to learn from other franchisees and share best practices.
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If the franchisor does not have a proven system of operations and training, walk away. You are buying a reduced learning curve. The more structured the better in their training of you and holding you to their standards. Too many potential franchisees hear what they want to hear about freedom and support prior to opening but once they open, they want to be treated as if it was their own fiefdom. Smart franchisors choose people who will embrace and follow a system so the brand has the same experience across the country. The only way you’re going to be profitable is if everyone follows an approved system and it’s not the wild wild West to be doing whatever you want – particularly when it comes to food service.
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This is the make or break of any franchise - Support. I've seen franchises rise and fall based on this factor alone. But what type of support is needed? I've seen franchisors pour their heart and souls into servicing a franchisee, only to have them turn around and cry "no support", bewildering the franchisor. The problem is that franchisors and franchisees have very different definitions of support. It is vital to find out from your franchisees (market research) what they truly mean when they ask for support and how does this manifest in actions and tangible services. For many immerging franchisors, "support" means being available by phone. But for many new franchisees, support means having in person help, on-site setup assistance, etc.
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Support should be clearly defined in the FDD and the potential franchisee should feel comfortable with it. There is so much that goes into running a business and franchise support must be focused on driving successful implementation and support of proven systems. In my experience the most critical part of support is new franchisee onboarding and initial training. If a strong foundation is set before opening or taking over a transfer, supporting that franchisee is much easier going forward. Make sure initial training / franchise school addresses different aspects of learning.
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Support should be clearly defined in the FDD and the potential franchisee should feel comfortable with it. There is so much that goes into running a business and franchise support must be focused on driving successful implementation and support of proven systems. In my experience the most critical part of support is new franchisee onboarding and initial training. If a strong foundation is set before opening or taking over a transfer, supporting that franchisee is much easier going forward. Make sure initial training / franchise school addresses different aspects of learning.
Innovation and adaptation include the changes, improvements, and updates that you and the franchisor can make to your products, services, processes, systems, and strategies to keep up with the changing needs of your customers and the market. You should be open and flexible to innovation and adaptation and see how they can enhance your competitive advantage, customer value, and brand image. You should also communicate and collaborate with the franchisor and other franchisees to provide feedback, suggestions, and insights on how to innovate and adapt.
Goals and performance include the objectives, targets, and indicators that you use to measure and evaluate your franchise success, progress, and challenges. Set realistic and specific goals and performance for your franchise and track them regularly and systematically. Compare your goals and performance with the franchisor's benchmarks and standards, as well as with other franchisees' results and experiences. Use your goals and performance to identify your strengths, weaknesses, opportunities, and threats, and to plan and implement actions to improve your franchise profitability.
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One huge thing that influences profitability in franchising are products/services that have high-margins built in. That said, if you're a franchise buyer, try to find franchise opportunities that are considered high-margin businesses. Examples include disaster restoration, food franchises that offer alcoholic beverages, and home remolding businesses. But make sure they're a good fit for your skillsets.
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