Franchise Buying Advice - Tips for Finding the Most Profitable Franchise

tips to choose a profitable franchise

Want to become the owner of a franchise? Make sure to look into franchises that are the right fit.

But finding the right franchise opportunity is not that easy.

There are many ways for outlining the most profitable and successful franchises. For instance, the criteria by Franchise Business Review for the franchises in the United States that make the most profit include the following factors:

  • Franchisee satisfaction
  • Financial outlook of the franchises

Although there is no one way to find out the most profitable franchise. But the most profitable and successful franchises share a few common things.

These franchises:

  • Have strong and efficient processes applied to all of its locations?
  • Have a product/service convertible for different customers.
  • Have a product/service that can adapt to the customer’s behaviors or habits.
  • Support its franchisees in the best way possible.
  • Have an effective customer rapport.

These are the most common indicators of a profitable franchise.

How Much Money Can My Franchise Make?

The above is the most common question that all prospective franchisees wonder.

But there is not a single approach for locating a profitable franchise in all circumstances. The success of a franchise depends on the following factors:

  • Location
  • Market dynamics
  • The work ethic of franchisee

It is crucial for each prospective franchisee to research some specific franchises and decide which best fits their financial payoff.

To guide you in making your best decision, here are some tips on how you can choose the most profitable franchise for your success.

Where to start?

The best place to start your research for finding the best franchise is to go through item 19 of the franchise disclosure document (FDD).

begin research with item 19 of FDD

Item 19 of the franchise disclosure document is particularly for earning claims. It is also known as financial performance representations (FPRs).

FPRs provides an idea of what are the steps to buy a franchise to make sure it is profitable. But this should not be considered as a predictor of what will happen afterward.

Remember, item 19 is not compulsory but more and more franchises are adding them to their FDDs.

The following are two examples of financial disclosures.

You can see the Actual Average and Median Annual Revenue of the franchise that has been working for between 1 - 7 years.

According to the franchisor:

“The actual average and median annual revenue numbers do not reflect the costs of sales, operating expenses, or other costs or expenses that must be deducted from revenue to obtain net income or profit. [Franchisees] should conduct an independent investigation of the costs and expenses they may incur in operating [their franchise].”

Length of operating history13-24 months25-36 months37-48 months49-60 months60+ months
Number of franchises in sample51216214
Median revenue per franchise $629,579$751,444$865,174$1,262,403$961,980
Average review for franchise $650,813$747,250$882,664$1,262,403$1,009,240
Number and percentage of franchises at or above average 2 (40%)6 (50%)2 (33%)1 (50%)6 (43%)

Below is the second disclosure example of 5 franchises of one year period. These franchises are in operation for an average of more than 8 years.

REVENUE

MedianAverage At or Above Average Below Average
Member Revenue$775,448$777,88623
Revenue from Services$147,805$138,43932
Other Income$22,213$31,38423
Product Sales$13,918$14,99623
Total Revenue$970,868$962,70632

Expenses

Payroll and Related Taxes$425,754$426,25623
Rent$112,954$114,31023
Royalties$49,842$50,90523
Supplies$43,124$41,54632
Advertising -- Franchisor$34,889$35,63323
Bank Charges$31,808$32,14323
Insurance$16,408$16,17932
Utilities$14,281$13,86432
Operating Supplies/Expense$9,999$9,58132
Cleaning/Maintenance$7,624$9,00123
Products$7,179$7,08532
Professional Services$4,250$4,62923
Miscellaneous Expenses$3,918$4,12814
Computer Fees$3,900$3,90050
Taxes and Licenses$3,407$4,54923
Advertising -- Non-Franchisor$2,214$2,49923
Office Supplies$1,299$1,34423
Total Expenses$787,254$777,55223
Net Income$183,614$185,15423

Why Revenue Doesn’t Equal Profit?

Let’s take a closer look at the second disclosure example, as you can clearly see that revenue is not equal to profit.

Revenue is the total income that a franchise makes in a specific time period. And profit is the difference between the amount earned and the amount spent in a specific business operation.

profit = revenue-operating cost

For example, if the total amount you have earned is X and the operating cost is Y then the profit will be X-Y.

Revenue - Operating Cost = Profit

Operating costs are the costs required to keep the business running. These includes:

  • Inventory purchases
  • Administrative dues
  • Rent
  • Payroll
  • Utilities
  • Marketing
  • Office supplies
  • Insurance and taxes

Operating cost decreases after the first operating year and stabilizes soon after that.

Profitability and the Role of Franchise Choice

Shaping the model for profitability starts even before buying a franchise. To minimize the initial investment, one good strategy is to consider various different industries available.

Let’s take a look at the following franchises and based on each description ask yourself which franchise you would choose?

Franchise A:

  • In the fast-food industry for almost decades.
  • Has a strong international presence.

Here is the financial data of Franchise A:

  • Total revenue is $1,115,990.
  • Operating expenses are $963,390.
  • Profit/income is $152,600.

Franchise B:

  • In the child education industry for more than 30 years.
  • Operates in one country.

Here is the financial data of Franchise B:

  • Total revenue is $889,413.
  • Operating expenses are $646,486.
  • Profit/income is $242,927.

Franchise C:

  • In the fitness industry for more than years.
  • Operates in more than 12 countries.

Here is the financial data of Franchise C:

  • Total revenue is $454,200.
  • Operating expenses are $315,300.
  • Profit/income is $138,900.

Many franchisees believe that the popularity of a franchise can greatly impact profitability. Popularity can be helpful in establishing a connection between the customers but finding a franchise that fills a gap in the market without overemphasizing its popularity can be more profitable.

It all comes down to LOCATION

The location you choose for your franchise greatly impacts your financial success. A good approach is to survey it extensively before you submit your location for approval.

choosing a location for a successful business

Consider the following for choosing the best location for your franchise.

  • What is the immediate cost of renovating a new build at the location?
  • Entry and exit to your property are easy or not?
  • If you are leasing a location, how much will it cost?
  • Check your neighborhood and make sure there is an ample number of potential customers for your product or service.
  • Neighboring businesses are complementary or competitive?

Questions to ask other franchisees before buying a franchise

The FDD also provides a list of franchisees that you can use to locate them and speak with you to get a clear idea of your business’s future. You need to be well aware of the rules and regulations before signing a franchise agreement.

The following are some good questions:

  • What was your total initial investment?
  • When your franchise made the first profit?
  • Is your total profit the same or increasing each year?
  • Would you choose any other franchise if you could go back?
  • How helpful and supportive is the franchisor in your business operations?

The answers you get may not be specific because several franchisors do not allow their representatives to disclose financial information about a franchise.

Nevertheless, the conversation with the franchisees will guide you in the process of identifying key elements and making an informed decision.

Most Profitable Franchise Categories Right Now

It is a good idea to read about certain successful industries to guide you in locating the most profitable franchise.

The most profitable franchise industry is food. Undoubtedly, the food industry will always be on the top list of moneymakers. Don’t just rely on big food industries like McDonald’s and Pizza Hut. but it is better to identify the current trends in your area and find out what people like to eat. This could be the best strategy for developing staying power.

Another demand is for home services as people not having enough time or desire to do such tasks often require these services.

As per the ABC News report,

“Not only are Americans working longer hours than at any time since statistics have been kept, but now they are also working longer than anyone else in the industrialized world.”

Other profitable franchise industries are health & beauty and fitness.

Wrapping up!

Hopefully, now you know the cost of starting a franchise and has made some important considerations in the search for finding the most profitable one.

To sum up, all successful franchises have the following things in common.

These franchises:

  • Offer a great product or service.
  • Employ the best marketing strategies.
  • Make sure their franchisees are making a profit.

Here is how you can achieve this.

  • Read press releases that announce milestones other franchisors are targeting.
  • Visit other franchise websites and if it matches what you seek then use their franchise portal to contact.
  • Read about specific franchises and find helpful information as a starting point.
  • Do in-depth research and ask other franchisees what steps they followed for choosing a profitable franchise.

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