Can franchises make money?

If you're like most people, at one point or another you've dreamed about owning your own business. You may have even figured out what kind of business you want to open. But now what? Do you start from scratch, or do you join a Franchise? Do you do it by yourself, or do you find a partner? Chances are someone you know has talked about Franchises before, and told you with 100% confidence that they're cash cows. Just look at McDonald's, Burger King, etc. After all, you yourself have purchased from a Franchise in one way or another countless times. It has to be profitable, right? 

Most people are aware of the general idea of Franchising (if you're not, search around this blog for some more dedicated posts). They are time-tested, reliable business models that will allow you to use their systems and branding in exchange for a fee and a promise to follow the rules and be good brand ambassadors. But that doesn't exactly answer your primary question, will a Franchise actually make you money? The answer, of course, is a big, resounding maybe. And what goes into that 'maybe' is what you really need to know.

Factor 1: Pick your industry

If you're thinking about Franchising the 'right way', you're thinking about it for the long-term. That means that in order to make money, you need to be sure that the good/service the Franchise is selling will actually be relevant for the long-term, and that it's something you are going to like for the long-term. First, think about the industry. Franchises exist across all sorts of different industries, from cleaning to food to financials and more. Pick an industry that you think has a) been around for a while and b) will probably also be around for a while to come. Remember too, that Google is your friend when it comes to finding out just how stable an industry is. 

Take, for example, the Canadian Foodservice Industry. It seems like this is a fairly safe industry, but how do we really know? Let's Google 'stats on Canadian foodservice industry' and see what comes up. Based on some quick research, Canadian Foodservice:

• Earns $85 billion in annual sales
• Accounts for 4.0% of Canada's GDP
• Employs 7% of all Canadian workers, including 1/5 of all young people 15-24 years old

• Has approximately 22 million restaurants visits/day
• Approximately 81% of Canadians indicate that they eat at Quick Service Restaurants at least once per month, with 39% saying at least once per week

From a simple search, we can see with a high level of confidence that this is a strong industry that likely isn't going anywhere but up anytime soon. Now that you're confident about the industry, think about whether or not you really enjoy that industry. If you hate having to cook for yourself at home, you're probably not going to like managing a kitchen. If you can't stand fixing things around the house, steer clear of home service Franchises. There's not sense picking an industry that is going to last the long-haul if you aren't. 

Factor 2: Find specific companies in that industry

Once you've picked an industry that is strong and that you like, you need to start to focus in on the specific companies and how they operate. Again, using google you can easily find the largest companies in the industry. A search for 'largest pizza franchises' shows you a top 3 list of:

1. Dominos Pizza
2. Pizza Hut
3. Little Caesar's 

Of these top 3 companies, two of them are publicly traded, meaning that every year they publish financials and other information around their store and their business plans for the public to see. These can offer great insight into how the industry is moving, and what it's biggest players are thinking about. It's important to remember though, that just because these companies are biggest doesn't mean that they're the best for you to invest in. The secret to figuring this out comes in Factor 3.

In finding franchises that can actually make you money, though, often the 'largest' aren't the best. Many of the world's most recognizable franchises have selection criteria that are simply too difficult for the average person to pass through. For example, some require a personal net-worth of $3-5 million, some only allow people who have worked in the company for at least 2 years to apply, some charge Franchise Fees upwards of $1 million, etc.

In our opinion, it is far better to look for a Franchise model that has been time-tested, but also has large future growth potential. This way, you can get the safety of a tested model, with the upside of a brand that will only get more recognizable and open more locations (which you can also potentially be a part of - see multi-unit ownership) for decades to come. Pairing a concept like this with an industry that is stable and has a history of demand is a win-win and opens doors for Franchisees that would typically be unavailable in brands that have already reached market saturation. 

The right company should be one that has the following:

• A service/good that you like
• A history and clear track record of success in their market
• Solid support systems in place
• A plan for future growth and success, ideally through continued new-market expansion as opposed to territory splits
• A process that actually allows you to get involved (most people would not be eligible for franchising with any of the 3 brands mentioned above)
• Strong unit-level economics

Factor 3: Understanding 'Unit-Level Economics'

Unit-level economics is a fancy word for how an actual store, in an actual building, in an actual city does in an actual period of business. $5 billion in sales sounds amazing, but if a company does this through 500 000 stores then each store is only earning $10 000/year in sales....not so great anymore. Similarly, let's remember that sales/revenues show the 'top line' amount of money into the company, before expenses have to be paid out. What's better:

A) A company with $100 000.00 in annual revenue and a net profit margin of 5%

B) A company with $10 000.00 (1/10th of company A) in annual revenue and a net profit margin of 50%

Answer: They're both going to earn you $5 000!  

The three Pizza Places listed in Factor 2 all have different AUV's (average unit volumes - how much the average location makes in a period), and different profit margins. So although Domino's is ranked first in revenues, it doesn't necessarily mean that it's a better investment than Little Caesar's, or something farther down the list. 

You should try to understand what the typical food cost and labour cost as a percentage of revenues are in each model (together referred to as Prime Cost %). From here, you can get a good idea of how much money you might make as a Franchisee in a particular chain. 

Now, you can't just call up a Franchisor and ask them 'how much money will I make if I open one of your models?', or 'What will my food cost/labour be?' and expect to get the answer you're looking for. They will, rightly, tell you that that's entirely dependent on you. While they have created models, and will have benchmarks that they set in their own Corporate stores, there is no guarantee that you will follow the systems and thus achieve similar numbers. So, how then are you supposed to get clarity on this question? Ask other Franchisees! 

Factor 4: Talk to other Franchisees

These people are without a doubt your greatest resource for understanding if a Franchise will actually make you money. These are people who have been exactly where you are, and have taken the leap. They can tell you exactly what to expect, and, if they're comfortable, exactly how their decision has panned out for them so far. As well, you can sink your teeth into an actual location; you can visit the store, ask if the Franchisee will let you take a tour, see how busy they are, how big their location is, etc. all with your own eyes. 

Once you've picked an industry and short-listed some companies that you think could work, talking to a Franchisee and visiting locations should absolutely be on your list of things to do. You'll get a much more transparent look at the real-life operations of the business than any Franchisor will be able to tell you in introductory calls, and when you do proceed with the Franchise of your choice you will do so armed with much more information and confidence about your choice. 

Think about how much you use reviews in your day-to-day life. Should we try that new restaurant? Well, what did other customers say about it. Should I buy this item on Amazon? Well, what did people rate it. Should I watch that show? Did my friend like it. Reviews might just be the single-most important influence on our decision-making process, so if you want to find out if a Franchise can make money for you, I encourage you to get right to the core and speak to other people who are currently making money in that Franchise model to understand if you'll be able to similarly benefit. 

Summary

Franchising has brought livelihood to millions of people all over the world. Its magic comes from pairing the right concept with the right Franchisee and the result is sustained earnings for decades to come. If you're looking, and want to understand which franchise will make you money, it's best to start with the industry and think about segments that are both time-tested and future-proof, then pick companies that you have seen and know are successful. Dive into the unit-level economics on those companies through online searches, calls to the corporate offices, and most importantly other Franchisees, and you should have no problem identifying the money-making potential in your concept of choice.