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Can a franchise make money?

Buying into a franchise is an excellent way of getting out of the rat race and into your own business, without the risk and extortionate costs associated with starting from scratch.

For franchisees, this business model offers the opportunity to tap into a tried and tested company and, for established business owners, the opportunity to expand with a minimum outlay of money and effort quickly.

These days, there are a vast number of franchise opportunities out there in every industry, from fast food to essential care. As well as being lucrative, the franchise business model is often considered to be recession-proof since it tends to deal in low cost, everyday purchases. This was highlighted in 2020 when a huge number of franchise businesses thrived, despite the world being locked into a global pandemic and all the restrictions that came with that.

How franchisors make money

Once a business is established and has a proven customer base, the natural desire is to expand. While progressing a business can be fruitful, it can also be expensive and complicated – particularly when trying to break into international territories.

For business owners, franchising their brand allows them to grow quickly without the hassle and expense often associated with doing so. Franchising involves allowing individuals to buy into the business to increase the brand’s reach.

For the business owner, franchising can be extremely lucrative. Here’s how:

Buy-in fee

When franchising a brand, the business owner will usually charge an initial buy-in fee which the franchisee must pay when signing the franchise contract. This fee will vary from brand to brand, and buy-in fees can range from a couple of hundred dollars to several hundred thousand.

Start-up fee

As well as the rights to use the logo and branding, the franchisor will often provide a number of other start-up services, which might include: training, products, equipment, uniforms, support

The franchisee will pay for these services with what is known as a start-up package fee.

Royalty fees

Once a franchisee is up and running, they will be required to pay royalty fees to the franchisor. These fees are usually paid monthly and, in most cases, will be calculated based on a percentage of takings from the franchisee’s business.

Add on fees

In some cases, a franchisor will charge additional fees to cover ad hoc items such as: advertising, ingredients, manufacturing, upgrades...

For a franchisor, the buy-in and start-up fees, coupled with ongoing royalty fees, can provide a significant income; particularly when multiple franchises come into play.

Needless to say, a franchisor only makes money when the franchisee does, and, as such, it’s incredibly important to offer comprehensive training and support to ensure that the franchisee is successful

How franchisees make money

There’s no doubt that a franchisee will often be required to make a significant investment when buying into a franchise. This investment will often come from funding that will need to be repaid to a bank or other financial organisation.

While this is very much the case, the important word here is ‘investment’ as significant income is to be had from a franchise business. When buying into a franchise, the franchisee will pay a lump sum of cash in the form of buy-in and start-up fees which will vary widely depending on the business. These fees give the franchisee access to the company’s logo and branding as well as all of the products, equipment and support they need to get started.

For the franchisee, franchising can be extremely lucrative. Here’s how:

Making sales

Once a franchisee has their business up and running, they can take advantage of the brand’s established reputation and ongoing promotion, advertising, and support making attracting customers so much easier than it would be when going it alone.

The franchisee will make money through profits gained through sales. Although a percentage of this will be paid to the franchisor through royalty fees, the successful franchisee can make a significant amount of money by selling the brand’s products or services.

It goes without saying that the more sales the franchisee makes, the more income is generated. A franchisee can expect to work hard in tandem with the franchisor to ensure adequate investment in promotion and advertising.

Adding franchises

When a franchisee has achieved success with their business and has proven their commitment to the brand, the franchisor will often actively encourage them to expand by buying further franchises.

Franchisors will always value hard-working, successful franchisees and offer incentives such as discounts to make it easier for the franchisee to expand. This will usually be an excellent opportunity for the franchisee to maximise their profits and gain an increased market share within their community. This kind of expansion can provide the franchisee with additional financial freedom and the chance to build a nest egg for retirement.

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