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How Profitable Are Franchises

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DYET

PARKED
Dec 8, 2007
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0
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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?
 

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Yankees338

Bronze Contributor
Jul 24, 2007
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NJ/MD
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!
 

Andrew

Contributor
Aug 8, 2007
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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.
 

Bilgefisher

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Read Millionaire Fastlane
Aug 29, 2007
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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.
 

mm2003

New Contributor
Aug 15, 2007
16
5
19
Ohio
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
 

yveskleinsky

Silver Contributor
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Jul 26, 2007
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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:

mm2003

New Contributor
Aug 15, 2007
16
5
19
Ohio
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.

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.
 

kimberland

Bronze Contributor
Jul 25, 2007
825
120
38
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.
 

kimberland

Bronze Contributor
Jul 25, 2007
825
120
38
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.
 

kimberland

Bronze Contributor
Jul 25, 2007
825
120
38
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.

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.
 

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santiago

Contributor
Aug 20, 2007
109
30
35
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.
 

mm2003

New Contributor
Aug 15, 2007
16
5
19
Ohio
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.

What franchise is this?
 

White8

Contributor
Dec 6, 2007
273
47
30
48
Salem, OR
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.
 

mm2003

New Contributor
Aug 15, 2007
16
5
19
Ohio
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.

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.
 

kimberland

Bronze Contributor
Jul 25, 2007
825
120
38
I was interested because the few franchises I have invested in have been nothing like that.

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.
 

Jason_MI

New Contributor
Jul 25, 2007
106
8
15
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.
 

mm2003

New Contributor
Aug 15, 2007
16
5
19
Ohio
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.

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.
 

hakrjak

Bronze Contributor
Read Millionaire Fastlane
Sep 15, 2007
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Colorado Springs
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
 

The Abundant Man

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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.
 

AlessioLC

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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.
 

Walter Hay

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Need to develop a brand that can sell franchises! That's Fastlane IMO
There is a huge range of businesses that can be franchised, from manufacturing through services, to wholesale and retail.

Franchises in the restaurant and fast food industries are notorious for their oppressive restrictions, but many franchise systems have rules that I consider unreasonable.

When I instructed my attorney to prepare a standard franchise agreement for me, he nearly fell off his chair when I emphasized that I wanted it to be fair to both parties, and if it was weighted in one direction or the other, it was to favor the franchisees.

It turned out to be the shortest franchise agreement he had ever written, but it worked perfectly. I believe the equitable terms prospective buyers found when first viewing the contract was a major factor in making it so easy to sell the franchises.

Over the 22 years that I ran my franchise empire, spread over four countries, I only had a problem with one franchisee, and I had to terminate the agreement due to his failure to pay royalties.

Friends have occasionally asked me to review franchises they were contemplating buying, and in every case I had to tell them that I would not buy one like the one they were considering. Good franchises are hard to find.

I know of some franchises that are designed to fail!

One in particular worked this way: Turnover and profit figures from one successful franchisee were used, but they didn't disclose that the franchisee had received special treatment that made sure he did well.

When one of the numerous franchisees failed, the franchisor happily terminated the agreement and sold that territory to another unsuspecting buyer. Those repeated lump sum fees were what made that franchisor rich.

Being a franchisor is a great way to scale and you can do it rapidly if you have a good system, including good marketing and high profit margins.

If you decide to go down that road, I hope you will learn from my experience that treating your franchisees well pays great dividends.

Walter
 

Private Witt

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

Im very excited to say I've developed a brand that is getting interest in franchising out in the cannabis industry. It will take me a good part of 2019 to get to that point, but exciting to have a few prospective partners lined up and ready to go. I need to start the leg-work on legalities as its going to be complicated.
 

Private Witt

Bronze Contributor
Read Millionaire Fastlane
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Seattle
There is a huge range of businesses that can be franchised, from manufacturing through services, to wholesale and retail.

Franchises in the restaurant and fast food industries are notorious for their oppressive restrictions, but many franchise systems have rules that I consider unreasonable.

When I instructed my attorney to prepare a standard franchise agreement for me, he nearly fell off his chair when I emphasized that I wanted it to be fair to both parties, and if it was weighted in one direction or the other, it was to favor the franchisees.

It turned out to be the shortest franchise agreement he had ever written, but it worked perfectly. I believe the equitable terms prospective buyers found when first viewing the contract was a major factor in making it so easy to sell the franchises.

Over the 22 years that I ran my franchise empire, spread over four countries, I only had a problem with one franchisee, and I had to terminate the agreement due to his failure to pay royalties.

Friends have occasionally asked me to review franchises they were contemplating buying, and in every case I had to tell them that I would not buy one like the one they were considering. Good franchises are hard to find.

I know of some franchises that are designed to fail!

One in particular worked this way: Turnover and profit figures from one successful franchisee were used, but they didn't disclose that the franchisee had received special treatment that made sure he did well.

When one of the numerous franchisees failed, the franchisor happily terminated the agreement and sold that territory to another unsuspecting buyer. Those repeated lump sum fees were what made that franchisor rich.

Being a franchisor is a great way to scale and you can do it rapidly if you have a good system, including good marketing and high profit margins.

If you decide to go down that road, I hope you will learn from my experience that treating your franchisees well pays great dividends.

Walter

That is amazing you were in four countries.
 

Walter Hay

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That is amazing you were in four countries.
That was relatively easy because the niche that I chose was relevant in all English speaking countries, and once proven in one country it was not difficult to sell in another. In case you do set your idea in motion, I will give you a brief outline of how it worked for me.

In my home country I set up branch operations employing commission sales people. Once that territory was bringing in good profits I advertised it for sale as a going concern and had no difficulty selling the franchise.

When starting in each new country I did informal market surveys, personally visiting a number of prospective end users across the country, with what amounted to a preselling approach. The reception I received showed that the product quality and service problems that I was addressing were widespread.

I already had a fully functioning system, and began advertising the franchises. Back in 1992 when I began international franchising, I was able to sell those greenfield franchise licenses for $30,000, equivalent to close on $55,000 today.

After the second country was established I was able to sell a greenfield Master Franchise for $150,000, and set about selling the initial sub franchises for the new Master Franchisee.

From then on the Master Franchisees were responsible for growth, and their existence made it possible for me to relax because they had to deal with the individual franchisees on a daily basis. I just banked checks.

Walter
 

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