How Much Do Franchise Owners Make?
The idea of being independent as your own boss is appealing to many people in the United States and all around the world. However, it is not that easy to start a company in today’s competitive market - you need to have a strong idea of how to stand out among numerous other brands that already have built some trust among customers. For this reason, many business beginners turn to a much easier and more convenient solution that increases their chances of success, which is buying into a franchise.
A franchise is a licensing agreement that makes it possible for a party (called a franchisee) to legally use trademarks, proprietary knowledge, and operation processes of an already working company (referred to as a franchisor). Thanks to such a license, the franchisee can function under the franchisor’s name, benefiting from its well-established reputation. This is the system we utilise at Kitchen Tune-Up!
However, before choosing such a path, you might be wondering - how much do franchise owners make exactly? What kinds of fees do they have to cover? Here, we will try to provide a relevant answer to these questions and more!
What Kind of Fees Does a Franchisee Need to Cover?
Before deciding on becoming a franchise owner, you should be aware of the fees your franchisor will charge you. Below, you will find the most commonly applied ones.
The Franchise Fee
A franchise fee is a flat fee that every new franchisee needs to pay up-front just after signing the agreement with their franchisor. Such an initial franchise fee is introduced as a sort of compensation for the costs that a franchisor (a.k.a. a brand owner) needs to spend to set up the new branch of the franchise. This includes the expenses on training, recruiting, and providing support to franchisees. After covering this fee, apart from obtaining the right to use the brand name and sell particular products or services, the franchisee is also provided with help to set up their unit and run their business.
Some experts say that when a franchisor develops its business’s payment structure, it should not set the initial fee too high. It is because to be successful franchisors, they need successful franchisees - such a relationship requires focusing on supporting the new company as much as possible. If the initial investment is the main source of income, some franchisors are tempted to sign a high number of agreements, even with franchisees that do not seem to fit, just to get more money upfront. The best idea for a franchise business is to have well-balanced fees and carefully choose the companies that seem to match the franchise brand, so be careful to pick a good franchisor such as Kitchen Tune-Up who will truly support you, not just get the initial income.
The Royalty Fees
Most franchisors base their income on royalty fees. How much money they can make and on what conditions are always explained in the agreement, but normally it is a fixed flat rate or a percentage of gross or profit that the franchisee makes.
A typical franchisor would like to reach a position where their royalties make up for all the overheads associated with working in the franchise industry. To achieve this, they need to get as high royalty fees as possible from all the franchisees. However, it does not mean they should raise the percentage they obtain from the gross or profit of their business partners.
A better approach for them is to keep in mind that if a franchisee unit improves, their business profit will be higher every month, meaning that the royalty fee income will increase as well. Hence, most franchisors are very devoted to the development and support of their franchisees as it is a contribution to their annual income.
Apart from the already mentioned standard fees, some brand owners earn extra money on certain additional charges. For instance, they may demand from franchisees to purchase particular products (like equipment or ingredients) or invest in certain promotional materials.
It can be arranged to either produce or sell them directly to their franchisees or have a deal with a manufacturer to receive a cut of the profit. What is more, add-on fees can be associated with advertising, system management, or technology.
The 80/20 Rule
The 80/20 rule is a well-known concept in the franchise industry. It means that 20 percent of the franchise business owners (franchisees) are the top performers, and they have reached excellent results, with multiple locations and a successful team of people around them. Thanks to their stories, more and more people start to be interested in such a model.
And what about the franchise owners who make up the other 80 percent? As an example, we can focus on beverage and food franchises. As Franchise Business Review reports, 37 percent of food franchise owners make less than $50,000 per year, and only 16 percent (the already mentioned “top performers”) earn over $200,000 per year. And how much do franchise owners make a year on average in this industry? According to the data gathered by Franchise Business Review, it is $120,000 for franchise branches open for two years or more.
One of the biggest food franchises that can serve as an example here is Chick-fil-A. Their franchise owners earn $4.16 million per year on average, with initial investment counting only $10,000. However, keep in mind that in this case, there is a very specific business model applied, not involving store ownership or equity gain.
Why It Is Not Always Clear How Much Money a Franchise Owner (Franchisee) Will Make?
As a potential franchise business owner, you are probably very interested in finding out whether you can operate a particular franchise efficiently. Also, you would like to know if the financial representations have a point from an operations perspective. However, franchisors are not able to provide you with the exact information on your expected income or business projections because there are too many factors that do not depend on them. As a result, they can instead provide any reference data in a standardized form called a Franchise Disclosure Document (FDD). In this document, you can find vital nuanced information on a particular franchise investment.
Such a restriction is actually meant to protect potential franchise owners. A franchisor may decide to provide financial projections about their business in the FDD but they will only be based on the financial performance of their franchise and/or corporate units in the past. Take into consideration that in most cases, franchisors update their FDDs once a year, usually before the end of April every year. If they choose to include a financial projection in their franchise disclosure statement, it will normally present the data from the prior year.
Bear in mind that even if the shared information appears fantastic, potential franchise owners cannot be promised anything. After all, business owners running another company’s playbook can either succeed or fail, depending on many different factors that are hard to predict. If a franchisor makes any promises on the annual income, it could indicate that they could be trying to deceive potential franchisees, and that is not ethical conduct.
It is essential for everyone interested in franchise opportunities to analyze each particular franchise offer in a non-biased manner. For this reason, the Federal Trade Commission (FTC) requires them to devote at least 2 weeks to review the brand’s Franchise Disclosure Document.
Why Is a Franchise Investment Worth Your Money?
Buying a franchise can have many excellent advantages. Here some of the most significant ones!
No Need to Come up With Your Own Idea
It may happen that you have enough money, business management skills, and determination to start your own company, but it is hard for you to come up with a creative idea that allows you to stand out among potential competitors. Franchises are a great solution to such a problem!
Many people decide on such an investment because they understand that a particular brand has dominated a certain industry. Instead of trying to fight an uphill battle to attract some of the dominant brand’s customers by starting an independent company in the same niche, they prefer to join an already successful business franchise. In this way, they can use their skills and time to become a prospering franchise owner rather than devoting a lot of effort to product development and building a new brand identity in what could already be a difficult market to enter.
Provided Training and Support
With a good franchisor, you will have a lot of help provided, covering:
- Location scouting
- Daily business operations
- Market analysis
- Customer base development
However, it does not mean that franchisees do not have to do anything but just show up and count the income. It is still the franchisee who has to take care of their company and its development, and the franchisor’s task is to provide a lot of professional help to boost this growth. Franchise owners earn the most if they combine their own devotion with the provided franchisor support correctly.
Decent Income Range
How much do franchise owners make a year? As has been previously mentioned, there is no one simple answer to this question because the annual income depends on multiple factors, but it is very likely you can make a decent living. According to CareerBliss, the average income entrepreneurs get from franchises is $60,000 a year. Nevertheless, it obviously means that many of them earn a lot more, but some of them may also make less. After all, it is highly dependent on the franchise’s certain niche, your business management skills, the investment size, and more.
No Qualifications Required
You may be convinced that we can only make a good living if we spend a lot of money and time getting outstanding qualifications. The truth is, you can avoid having to do all that by becoming a franchise owner! It is a fantastic way to change your career without having to return to college or university. Moreover, young people who want to leave formal education behind can also benefit from this path.
Bear in mind that certain franchise types may demand some specific qualifications (for instance, hair salons or fitness franchises) but in most cases, the requirements are not too high. Also, if you do not have a particular qualification, some franchisors may agree to help you develop it, treating it as an element of their franchising package.
The Bottom Line
How does a franchise make money? This industry is based on providing ideas and support and charging an initial investment as well as regular fees. Thanks to such help, buying franchises can turn out to be very profitable for you as a business owner. In most cases, you do not even have any specific educational background or experience because all the essential training is provided in the package. All you have to do is find a relevant franchisor who will offer decent help and charge reasonable fees.
At Kitchen Tune-Up, we always take thorough care of all of our franchisees across the US, providing them with all as much necessary information and support as we can. We are a team of committed specialists who are willing to share our knowledge and experience to contribute to your success. If you wonder how much you can make in the kitchen remodeling business, and you are willing to start a company in such a niche, visit our contact information page or give us a call on 1-800-333-6385. We are waiting for you!