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How Profitable Are Franchises

Discussion in 'Business Models, Niches, Industries' started by DYET, Dec 8, 2007.

  1. DYET
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    DYET PARKED

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    Speicifically Fast Food Franchises.

    Something like a Mcdonalds or Subway

    Does anyone on here own one or know someone that does?
     
  2. Yankees338
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    Yankees338 Bronze Contributor

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    My answer to this will NOT be based on facts, but they are just things I've heard from other people who either own franchises or know people who do...

    Several things contribute to the success of a franchise. First of all, location. Brand recognition (which is what you pay for with a franchise) will drive customers towards your business, but they have to be able to see it first. Of course, this is key with most businesses.

    Secondly, it depends on what you enter into that franchise. If you catch a franchise on the upswing, it will be hugely profitable. It is much harder to profit on a hugely successful franchise because they are so expensive up front once they become successful.

    I assume a franchise offers a much lower-risk opportunity for investors with money, which makes it more attractive to many of them. Having the background of a business like that helps with building a reputation, and a good reputation is critical when trying to run a successful business.

    Hope this helped!
     
  3. Andrew
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    Andrew Contributor

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    From what I've heard second hand, a pretty good Subway can make the franchisee may be $70k a year. Lots of work involved, its a full-time job. Lots of other variables of course, like location.
     
  4. Bilgefisher
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    Bilgefisher Bronze Contributor Read Millionaire Fastlane

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    There are several books out there on franchising. Believe it or not "Franchising for dummies" is a decent starter book. The original version was cowritten by Dave Thomas, founder of Wendy's. Not only was he a successful franchisee under KFC, he obviously was a successful franchiser. Many franchise practices today were invented by Dave Thomas.

    With a franchise benefits:
    -chain recognition
    -pre-established operating systems
    -company training on running the franchise
    -pooled advertising
    -established supply chains

    disadvantage:
    -franchiser rules can be very restrictive, not allowing owner flexibility
    -% of profits go back to the franchiser
    -sales can be affected by other franchisees. (example that burger with a condom inside in Vermont will affect the chain nationwide).
    -Legal agreements with the franchiser can be restrictive.


    there are more + and - but thats a start. They can be very profitable, otherwise you wouldn't see one person own several stores. A gentleman in my home town owns 5 or 6 subway shops.
     
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  5. mm2003
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    mm2003 New Contributor

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    As stated above there are many variables involved to determine profitability. I have been in the Subway system for a few years and had another franchise before that. Location is very important and can have a huge impact on profit and start up costs. Depending on what part on the country you are in, prices for existing locations vary drastically. I have focused on acquisitions due to the fact that the room for development in my area is very limited. Although you will typically pay a bit more for an existing location I feel it is a much more secure investment most of the time, especially when first starting out.

    From my experience the work involved in operating the restaurants is just like any other business. System tools, simplicity, and people are the key to success. The people you typically employee in the fast food industry are slightly rougher around the edges than other industries. The easier you make it for your employees the easier it will be for you.

    A few of the factors I focus on when perusing a location are the following:
    Number of hours store is open per week
    Lease (including CAM, taxes, ins, etc) and percentage rent
    Current hourly wage in the area and the minimum wage
     
  6. yveskleinsky
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    yveskleinsky Bronze Contributor Speedway Pass

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    I'm gonna cry "slowlane" here on this one. Reason being- you are focused on plugging into someone else's system, looking down the barrel of long hours and maybe 6 figures a year if you're lucky. Why not focus on creating your own franchise?

    ...I wanted to add, that while a franchise can be a good income generator it does not fit with the definition of "fastlane". There are other benefits to a franchise, such as a proven system and a support network- but the real money is in developing the system, not selling the product.
     
    Last edited: Dec 9, 2007
  7. mm2003
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    mm2003 New Contributor

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    I see your point although I would disagree with you. I do agree it can be considered a "slowlane" for some but that is true with any business. Profit potential can easily be 6 figures a year out of just one location, factor in another 10, 20, or 100 locations and you can see the benefits. Of course, expansion will require more management thus bringing down the bottom line of individual locations compared to an owner/operator but well worth it in my opinion.

    I think there are two different ways to look at this. The franchisors profitability will be on the back end, ten plus years down the road. It will take time and a lot of work to establish a good system and concept that investors and lenders are comfortable and confident with. Ten years down the road when you have a few hundred franchisees below you then I would say it is rewarding.

    From the franchisee prospective I would suggest to invest in a proven and established concept that the lenders and investors are comfortable with right now. I think you would find it much easier to expand at a much faster pace if that’s your goal.

    I have thought about creating my own concept and trying to franchise but I cannot see the short term benefit out weighing my current situation. Our plan from the start has been to double the number of units we own each year for the first five years and then grow at a much faster pace once proper management is in place. So far we are on that track and we are growing at a faster pace than expected. I think one of my driving factors behind this method is the amount of competition. There are so many different concepts and every one of them is trying to franchise. That in it self would lead me to believe that as a franchisor you will be looking for the investor whereas before it was the investor looking for the right franchisor.

    The fastlane involves acquiring massive amounts of wealth in the shortest period of time and I believe both of these strategies can fall into that category.
     
  8. djackson6
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    djackson6 New Contributor

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    new here thinking about buying a franchise. hopefully I'll find some good advice on here.
     
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  9. kimberland
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    kimberland Bronze Contributor

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    I got so many questions about franchising
    that I took a gig at the Cdn head office of one of the largest.

    Here's the thing.

    To make money, you need to have more than one restaurant
    (though look at return on investment,
    if you're investing a million dollars per restaurant
    and getting $100,000 a year in salary,
    is that a good deal?)
    OR
    own the rights to an area
    OR
    be one of the "examples"
    (i.e. suck up and/or be the first in the region)
    OR
    figure out some way to scam the system.

    Otherwise for an established franchise,
    it is a job and not usually a well paying one.

    Why?

    Because for the established franchises,
    all your sales and ordering info is sent automatically to the head office.
    You also have to report quarterly, often monthly financials.
    From there,
    head office figures out how much they can charge you
    - for rent (because they often hold the real estate)
    - for supplies and raw materials
    - for advertising
    - for franchise fees
    etc.

    Usually there is a formula
    figuring out how much they can take from you
    and magically that's how much they do.
    LOL

    Think of it this way...
    they need to make their growth numbers
    and there is a long, long, long list for owner operators.
    You are not, at all, bringing anything special to the table.

    The other big danger with the big franchises
    is that the owner operator
    can not control anything.
    Head office sets the menu, the price, the advertising, the branding, etc.
    so purchase price is set on best case scenario
    and you don't have a hope of making it better than that.
     
  10. kimberland
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    kimberland Bronze Contributor

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    BTW... owning more than one restaurant seems like the easy way to go
    BUT
    smart franchises won't let you accumulate any economies of scale.
    Why?
    Because of control.

    If they have 100 restaurants
    and sell all to you,
    then you control the company.
    If they sell them to 100 different people,
    then none of the owner operators have any pull.

    Now some of you are thinking...
    I could simply buy them from existing owner operators.
    Well, not if you're dealing with a savvy franchise.
    Usually there is a buy back clause in the franchise aggreement
    stating that the restaurants have to be sold back to head office.
    (think of how this will cap your selling price)

    Established franchises are big and powerful
    because they aren't run by dummies.
     
  11. kimberland
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    kimberland Bronze Contributor

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    The number of stores to be opened
    (within a specific region)
    is usually part of their initial franchise agreement
    (with penalties for non-compliance)
    so the owner operator doesn't have much of a choice.

    I'd be interested in hearing if the gentleman
    expanded his franchise agreement,
    that would be more telling.
     
  12. santiago
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    santiago Contributor

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    The benefits of being a franchisee are often times the reason so many entrepreneurs shy away. Imagine buying a business where you had no control over advertising, what you sold, how you sold it, where you sourced it and for how much you sold it. And, you gave a hefty percentage (5% +) away to another company for "showing you the way".

    I've had two friends that owned franchises (Quiznos and GNC) and both sold their franchises saying that they felt that they had a job, not a business.

    Financially, the GNC was owner-managed (i.e. either him or his dad were there all the time) and made about 75k per year. The Quiznos was owner-managed as well and made about 50k per year. I'd venture to guess they are fairly typical numbers.

    So, my opinion of franchises is you either make money on volume by owning multiples (most likely more than 5) or be an early adopter.
     
  13. mm2003
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    mm2003 New Contributor

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    What franchise is this?
     
  14. White8
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    White8 Contributor

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    I have never owned a franchise but I would be concerned that they may have the option of terminating the franchise at any time or placing too many franchises in a geographic area.

    I was a John Deere consumer and commercial products dealer, which was not a franchise but did rely heavily on one supplier. After promising an exclusive territory, John Deere allowed a dealership to move within five miles of my store as well placed product in Home Depot. Both of which decimated my sales and I closed the business before it bled too much red ink. I've also talked with other dealers who had their dealerships canceled despite winning sales awards.

    As a result of my experience, I would never rely too heavily on one supplier because they are in control of your business, not you.
     
  15. kimberland
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    kimberland Bronze Contributor

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    MM, you know that I can't answer that.
    I probably shouldn't have written what I did
    but I felt obliged to give people things to think about.
     
  16. mm2003
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    mm2003 New Contributor

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    I was interested because the few franchises I have invested in have been nothing like that. I have heard of a few that operate with a similar business model as you described but not very many. I'm not trying to argue that franchises are good or bad either. I think they are what you make of them and for some they can be very profitable and for others they can be the worst choice they have made.
     
  17. kimberland
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    kimberland Bronze Contributor

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    Awesome, another input.
    So what has been your average return on investment?

    In the major fast food restaurant
    I worked with,
    it was about 10% but that didn't include the cost of the owner operator's time.
    Once you factor in that time,
    the return goes from okay to low.
     
  18. Jason_MI
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    Jason_MI New Contributor

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    This is interesting. I just got done (in the past 6 weeks), spending 3-4 days at corporate headquarters for two franchisers. It was very....interesting.
     
  19. mm2003
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    mm2003 New Contributor

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    The two franchises I have worked with both larger chains involved in fast food. I have tried to focus on franchises with low start up costs that are well known. The ROI can vary depending on many factors but I have seen anywhere from 40%-70% return yearly with some involvement from myself with day to day operations. My focus has been turning around locations that have struggled because of bad ownership.

    A good stable location that was being sold a fair market value should generate a semi involved owner anywhere from 20%-30% easily. Of course you are going to have restaurants the do poor numbers and not come close to this return and others that do great numbers and exceed the above returns. Each location is unique and the ROI can be affected by many different factors.
     
  20. hakrjak
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    hakrjak Bronze Contributor Read Millionaire Fastlane

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    I had a friend who owned 2 X Subways, and they made about $35k a year each.

    I think if you're going to have a franchise, it's import to have a savvy manager who can run them for you. Pay them well, and aquire multiple franchises so that you can increase your profits.

    I was actually researching getting a "Knockouts" franchise for awhile this year. Like most of them, they want something crazy like $100k to start you out, and so I walked away pretty quick. Figured if I wanted to open a hip barber shop for guys, I'd just do it on my own for $25k and keep 100% of the profits... Why did I need their model anyway?

    Cheers,

    - Hakrjak
     
  21. Z5 FILMS
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    Z5 FILMS Contributor

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    +1

    I knew a guy that owned one. He was probably only making $25K -$35K a year with it which was suprising becuase it was pretty busy.
     
  22. The Abundant Man
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    The Abundant Man Gold Contributor Read Millionaire Fastlane Speedway Pass

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    I would consider franchises to be slowlane.

    I know a Jimmy Johns franchise in my local area. It is family operated. They actually have 7 locations spread out that they own. They also sponsor the local Hockey team. The owner is in day in and day out and very much is a big part of the daily operations even though each location has it's own managers. The owners even make sandwiches along the employees.

    But then again I know one guy who owns a local Dairy Queen and he's constantly on vacation. The place is run by a group of teenage girls.
     
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  23. AlessioLC
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    AlessioLC Bronze Contributor Read Millionaire Fastlane I've Read UNSCRIPTED Speedway Pass

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    When you open a franchise (experience talking), please be aware of the margins / profit that can be made.

    Even if a franchise got a strong brand, if you don't have enough margins to sleep well at night it will be a nightmare (not my case but i know some).

    Imagine having a Healthy Fast Food franchise location and not having enough margins to hire more employees which would normally allow you to get yourself out of the business and be the 'vision' and not the 'technician' < This is normally the plan.

    However, if you don't make enough profit out of the product you sell, it will be a slow painful death, you will create yourself a job, not a business.
     
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  24. Sebastya
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    Sebastya Bronze Contributor

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    Way to resurrect such an old thread lol
     
  25. Kyle Thumm
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    Kyle Thumm Aspiring Super Hero Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass

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    Need to develop a brand that can sell franchises! That's Fastlane IMO
     

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