Franchise Profit Report
UFOC / FDD EARNING CLAIMS:
Where else can you find this information?
Once someone decides that buying a franchise makes sense, it’s only logical to try and find the most profitable franchise to purchase. After all, given a choice between Franchise A that returns 10 percent per year and Franchise B that returns 15 percent per year, the results should be obvious, right? Well, maybe not. First of all, very few corporations elect to divulge earnings by their franchisees – actually, only about 25 percent of franchisors publish “earnings claims” in the franchise disclosure documents (FDD) they are required by law to provide to prospective franchise owners. And even these numbers can be difficult to hunt up, since the FDD is not generally considered public information. Some companies believe that publishing these figures can prove dangerous to their livelihood – whether as a tip-off to competitors as to how well or how poorly their stores are performing, or else to be misconstrued by new franchisees as a guarantee of a certain level of success. Second, the average profit generated by a group of franchisees is not necessarily indicative of the performance you may experience as a business owner. Variables such as location, market health, management style, managerial experience, and the state of the local competition all contribute to the profitability of one franchise over another – even those that are situated in similar markets. Every franchise system has its super performers, which the company will hold up as Bright Shining Examples of why they are the best at what they do, but these are rarely more than about 20 – 25 percent of all franchisees system wide.
Why is the government regulating franchisors?
Early in U.S. franchising history there were many instances of abuse, particularly where unjustified or misleading earnings claims were used to sell franchises. In 1979 Congress passed legislation authorizing the F.T.C. to regulate the franchise industry to try to stop any such bad practices. A number of states also passed similar legislation. The current F.T.C. and state rules do not forbid a franchise company from supplying information about the earnings that can be achieved in their business. They do, however, regulate how this information can be given to a prospective franchisee.
A franchise that wants to provide earnings claims must put it in writing in their UFOC disclosure document. Also, it is essential for the franchisor to make sure that the data provided is accurate and not misleading and they need to clearly label any assumptions or qualifications on the data provided.
Assuming they meet the legal requirements, a franchisor is free to provide whatever earnings information they want to a perspective franchisee in terms of sales, expenses, cash flow and income.
Why don't all franchisors provide this information?
It sounds relatively simple but there are still many franchisors that don't provide earnings claims. There are two likely reasons:
First, producing an earnings claim does involve effort and expense for the franchisor. Second, the results may not be attractive enough to assist in the recruiting of new franchisees.
If a franchise does not provide an earnings claim in their UFOC, the best source of information to find out how much money you might make is the existing franchisees of the system. Call them and ask. Item 20 of the UFOC provides a list of current and former franchisees along with their contact information. You will be talking to many franchisees anyway as part of your due diligence so make sure you also cover the subject of the averages and ranges for earnings in the system. By gathering actual performance statistics, you will have a realistic starting point in determining how much you can expect to make in a similar business.
What's a reasonable level of earnings for a franchise business?
Once you have earnings data, your next question will be whether the probable earnings represent a good return on your investment.
Remember that when you invest in a franchise, you are investing both your time/talent and your money. Therefore, you should reasonably expect a greater return than you would for a passive investment of money only.
If a good return for a passive investment is 10% to 15% per year, you will want to see a greater return in a franchise opportunity. After all, the time you put into your new business should yield you a return at least equal to the return on the money you invest, maybe not the first year but certainly down the road.
A second important point to consider is that a higher franchise investment does not necessarily mean a higher rate of return. While this seems contrary to common knowledge, there are plenty of low to mid-range investment franchises that provide great return on investments. Don't limit yourself only to high-investment franchises when seeking that business with a high ROI.
How much money you will make as a franchisee depends on many factors -- from the structure of the franchise (e.g. retail versus service), to how long your franchise has been operational, to how well you understand and embrace the system, to your enthusiasm for the business and how it will help you realize your dream. But, with a little research, you can get enough information to decide if this opportunity makes financial sense for you.
Analyzing the Most Profitable Franchises
Even without hard numbers staring you in the face, there are many possible indicators to examine when looking to buy a most profitable franchise. At the bottom of that list – but certainly the process that will provide you the most accurate information – is to simply call up some franchise owners and ask them. “Hi, I’m thinking about buying an XYZ franchise. Since you own one, perhaps you could tell me how much you make in a year?” Maybe you’ll get a reply, and maybe you won’t, but the worst thing that can happen is they’ll hang up on you. Maybe a private, in-person chat would serve you better. But there are other things to look for first, before you put your ego and your friendly demeanor on the line like that.
In my opinion your best bet to determine what franchises are the most profitable is to do your own research on the web, or by speaking with current or former franchisees of franchise concepts you are interested in. I would suggest politely and confidentially asking franchisees if they wouldn't mind sharing some general opinions about the profitability of their business and its products and services offered. I think you will be pleasantly surprised about how much good info you can discover. Another good sign of high profitability in my opinion is when a franchisee also owns multiple locations.
Publications and Rankings
Two major industry journals each publish their own rankings of the top franchises each year. Both Inc. and Entrepreneur magazines enjoy a reputation for honest analysis and fairly extensive details regarding each company on their respective lists. The most profitable franchises are not necessarily those that rank the highest, and the best choice you can make for a franchise that suits your talents, experience, interest, and financial capacity is not necessarily at the top, either. Entrepreneur rates 500 franchises annually, using the following criteria: financial strength, number of years in business, startup costs, growth rate, number of franchises in operation, and overall corporate stability. Franchise companies are also listed in their respective industry categories, as well as on a master list. This means that you not only get a feeling for how that fast food franchise stacks up against that auto repair business, but also which auto repair business leads the pack against its direct competition.
Adding to the Raw Numbers
Rankings alone cannot tell the whole story when it comes to divining the most profitable franchise, but looking at a company’s place on a list over the course of multiple years can be very telling. For example, some franchises are consistently at the top of their category, year after year. Others may have fallen a few steps off the pace. While this is not necessarily a bad sign – a hot upstart can always knock a long-term franchise off the pedestal in any given year – consistent slippage over the past few years could be a red flag. And one other factor needs to be remembered. Sales are not profits! A franchise that costs you $500,000 to open may generate net sales of $50,000 its first year. That works out to a 10 percent return on investment (ROI). But what if you only spent $200,000 to open a similar franchise that generates $25,000 its first year. Sure, your earnings are halved, but your ROI is 12.5 percent. Over the long haul, that may be a better deal.
1 comment:
The average Driven Brands Franchisee fails in three years. The CEO in all the pictures was forced to leave after about three years.
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