Once someone decides that buying a franchise makes sense, it’s only logical to try and find the most profitable franchise to purchase. After all, given a choice between Franchise A that returns 10 percent per year and Franchise B that returns 15 percent per year, the results should be obvious, right?
Well, maybe not. First of all, very few corporations elect to divulge earnings by their franchisees – actually, only about 25 percent of franchisors publish “earnings claims” in the franchise disclosure documents (FDD) they are required by law to provide to prospective franchise owners. And even these numbers can be difficult to hunt up, since the FDD is not generally considered public information. Some companies believe that publishing these figures can prove dangerous to their livelihood – whether as a tip-off to competitors as to how well or how poorly their stores are performing, or else to be misconstrued by new franchisees as a guarantee of a certain level of success. Second, the average profit generated by a group of franchisees is not necessarily indicative of the performance you may experience as a business owner. Variables such as location, market health, management style, managerial experience, and the state of the local competition all contribute to the profitability of one franchise over another – even those that are situated in similar markets. Every franchise system has its super performers, which the company will hold up as Bright Shining Examples of why they are the best at what they do, but these are rarely more than about 20 – 25 percent of all franchisees system wide.
Analyzing the Most Profitable Franchises
Even without hard numbers staring you in the face, there are many possible indicators to examine when looking to buy a most profitable franchise. At the bottom of that list – but certainly the process that will provide you the most accurate information – is to simply call up some franchise owners and ask them. “Hi, I’m thinking about buying an XYZ franchise. Since you own one, perhaps you could tell me how much you make in a year?” Maybe you’ll get a reply, and maybe you won’t, but the worst thing that can happen is they’ll hang up on you. Maybe a private, in-person chat would serve you better. But there are other things to look for first, before you put your ego and your friendly demeanor on the line like that.
Publications and Rankings
Two major industry journals each publish their own rankings of the top franchises each year. Both Inc. and Entrepreneur magazines enjoy a reputation for honest analysis and fairly extensive details regarding each company on their respective lists. The most profitable franchises are not necessarily those that rank the highest, and the best choice you can make for a franchise that suits your talents, experience, interest, and financial capacity is not necessarily at the top, either. Entrepreneur rates 500 franchises annually, using the following criteria: financial strength, number of years in business, start-up costs, growth rate, number of franchises in operation, and overall corporate stability. Franchise companies are also listed in their respective industry categories, as well as on a master list. This means that you not only get a feeling for how that fast food franchise stacks up against that auto repair business, but also which auto repair business leads the pack against its direct competition.
Adding to the Raw Numbers
Rankings alone cannot tell the whole story when it comes to divining the most profitable franchise, but looking at a company’s place on a list over the course of multiple years can be very telling. For example, some franchises are consistently at the top of their category, year after year. Others may have fallen a few steps off the pace. While this is not necessarily a bad sign – a hot upstart can always knock a long-term franchise off the pedestal in any given year – consistent slippage over the past few years could be a red flag. And one other factor needs to be remembered. Sales are not profits! A franchise that costs you $500,000 to open may generate net sales of $50,000 its first year. That works out to a 10 percent return on investment (ROI). But what if you only spent $200,000 to open a similar franchise that generates $25,000 its first year. Sure, your earnings are halved, but your ROI is 12.5 percent. Over the long haul, that may be a better deal.
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