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Franchises
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Article 2: Income Potential
According to FRANDATA
Corporation in Washington D.C., low-cost
franchises can be extremely profitable.
Advantage Performance Group sells franchises
that provide training and consulting. They have
a minimum investment of only $13,500. But among
the sample franchisees listed in the company’s
disclosure statements, gross revenue ranges from
$689,072 to more than $3 million, says
FRANDATA’s Edith Wiseman.
Knowing how much profit you can expect is dicey
business. Trade magazines and university studies
consistently show many franchisees complain they
earned less than they expected.
But if high-end franchises generate high income,
can low-investment franchises do the same? Is
the sky the limit?
“I don’t know that the sky is the limit,” says
franchise attorney Erwin Keup, author of
The Franchise Bible (PSI Research, 2000).
“But you can make a very good living.”
Franchisors generally set entry fees based on a
potential earnings. “You sort of do get what you
pay for,” says Mary E. Tomzack, president of
Franchise Help and author of
Tips and Traps When Buying a Franchise
(Source Book Publishers, 1999).
“The franchisor is going to look at these
numbers and say if the franchisee is going to
net $300,000 a year, the fee should be $50,000
or $60,000. But, if we are looking for a more
modest revenue, they are going to put it around
$15,000.”
High-end profit from low-end investments is more
likely when “the franchise involves prospecting
for customers,” says Tomzack.
Still, “If someone is a real hustler…they can
potentially with a low-cost franchise investment
get a terrific ROI (return on investment),”
Tomzack says. “It comes down to the capabilities
of the franchisee.”
To get an idea about the ROI (a ratio of profit
to dollars invested) for a franchise, you can
look at industry ratios. These ratios are
categorized by company size, assets and
North
American Industry Classification System (NAICS)
codes. The data is available at public libraries
and through the
Small Business Administration.
Just as you look at income potential, you must
look at income limitations. Different businesses
have inherent income limitations. A franchise
relying on one-on-one sales is limited by how
many sales people it employs. A franchise that
sells $2 widgets needs far more sales than a
franchise that sells $200 products.
The ultimate measure of potential income is
demand. Franchisors may give estimates about how
much money you can make by investing in their
franchise. But, experts urge caution in
evaluating earning claims. Projections can be
misleading. If only verbal claims are provided,
it’s a red flag.
The FTC’s Franchise Rule doesn’t require
franchisors to make earnings claims. But if
franchisors make them, they must be reasonable
and substantiated. Evaluate earnings claims on
these criteria:
-
How
many franchisees are in the example? A handful
or hundreds?
-
Are
average incomes distorted by a few high-income
franchises? What’s typical, not the arithmetic
average?
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Gross profits reveal nothing of costs or net
profits.
-
Compare franchise net profits to company-owned
outlets that can leverage buying power or get
price breaks.
-
Keep in mind geographic disparities.
-
Franchisees vary in skill, expertise and
know-how—all of which impact earnings.
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