Let’s say you are considering purchasing a franchise. During the investigation process, you are open to asking a franchisor: “How much do franchise owners make?”
This is a very interesting question that all want to know the answer to. You want to entrust your hard-earned investments to a business where you can have the assurance of profitable returns. Surely, you should not miss asking that to a franchisor you meet before signing an agreement.
The catch here is that most franchisors will simply respond “I can’t tell you.”
Are they lying or just playing safe? Not exactly. Whatever their responses would be, why is it important for you to know at least the estimate of your returns? The details below will help you gather more information.
How Much Do Franchise Owners Make in a Year?
It is more difficult to make a final decision especially if your investment is at stake. Do not hesitate to ask such a question of how much you can make if you pursue a franchise business.
Since the outcome of your actions is your responsibility, this is the reason why you want to investigate more about returns in franchising.
On the contrary, franchisors often choose to be on the safe side by not giving out an accurate amount of how much they can make. As they based their answer on History and Franchise Law:
- The early history of franchise sales in the United States contained many instances of abuse when 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.
- The current F.T.C. rules do not forbid a franchise company from supplying information about the earnings that can be achieved in their business venture. They do, however, have stringent rules on how this information can be given to a prospective franchisee.
If a franchise does not provide an earnings claim in their Franchise Disclosure Document FDD, to find the answer to how much franchise owners make, contact the existing franchisees. Ask this question to them. Make sure that you select enough franchisees at random to get a clear idea of the averages and ranges for earnings in the system.
This is one of the real quandaries of investigating most franchises. You’re not about to invest until you know how much you can earn; the franchisor probably has the best data to answer this question accurately, but they usually won’t tell you a thing.
The Answer is Twofold
Assuming they meet those two requirements. They are free to provide whatever earnings information they want to a prospective franchisee in terms of sales, expenses, cash flow, and income. Since it’s this easy, it begs the question of why more franchisors don’t answer this question: “How much do franchise owners make?”
1. Producing an earnings claim does involve effort and expense for the franchisor
Any franchise company that provides the earnings claim information must indicate it in their Franchise Disclosure Document (FDD). The franchisor makes sure that the data provided is as accurate and non-misleading as possible. So any assumptions or qualifications on the data provided must be clearly labeled.
2. The results (given that they have to be accurate and non-misleading) may not be attractive enough to assist in the recruiting of new franchisees.
Since history made it happen, there will be a question of credibility from the franchisor’s standpoint and its company as well if they push to provide an exact value of returns. Their efforts of providing an accurate answer as possible may even lead to frustrations and regrets in the future.
A good rule of thumb is that you can earn 10% to 15% of your money over time in a totally passive investment. I think most experts would see this as relative to the amount of the total investment required by the franchise.
Though this is often not the case in franchising, you would probably expect the income to increase as the investment required by the franchise increases.
Conclusion
The answer to the question How much can I make in the franchise business? doesn’t have an accurate answer. But here’s the bottom line:
- Since most franchises require that you invest your time as well as your money, you should expect a return significantly higher in order to justify the investment.
- Higher returns will offset the higher risk involved in a type of investment.
- You should look for earnings of at least 30% of your total investment on an annual basis to consider any franchise as having a reasonable return.
You should expect to reach these levels, at the latest, by the third year of operation of the business. Even if there’s no assurance of how much you can make in franchising but getting a franchise in the right location is an assurance of profitable returns.
How can you determine if a franchise will work in your area?
Answers to this question are also a great factor to include in your investigation.
