When considering to own a franchise, the biggest question in anyone’s mind is “Is this franchise going to be profitable?”
This question is most likely the greatest unsettlement for future franchisees, and at the same time due to plenty of associated factors, the answer is often difficult to discover.
Franchisors are able to promptly clarify the costs initiating a business, but none of them –regardless of how accurate their data is– can guarantee profits.
If you are considering to own a franchise, there is a fair amount of information to grasp beforehand.
A principal knowledge you need to perceive before investing in any franchise is the profitability potential; that way, you will make a more savvy decision.
In this article, we will spell out how to calculate the profitability potential of a franchise, followed by the least profitable franchises 2019 to give you a more comprehensive idea of what to invest in.
What are the general costs of opening a franchise?
To establish a new franchise, as suggested by The Wall Street Journal, a franchisee should be prepared to pay about 20% of the initial investment from their own pockets.
How much is 20% in reality? The answer is simple: It depends!
Multiple franchising opportunities exist in the market with various implementation necessities, nevertheless, if a franchisee seeks a more clear interpretation, in accordance with Franchising industry expert Michael H. Seid, founder and managing director of Michael H. Seid & Associates, the primary investment required for a franchise in one unit is customarily between the array of $100K to $300K.
The franchisor will most definitely inform you of the company’s Franchise Disclosure Document (FDD). This document sketches out the necessary information they are obliged to share with the franchisees that include starting costs all the way to litigation training and financial performance of the present franchise units.
A number of franchisors provide a detailed report on performance, however, others will prefer to only disclose averages and at the same time, some franchisors will only point out to reports of their most profitable units.
Keeping this in mind is of absolute importance while reviewing franchisee profits, as the data might not be fairly proclaimed.
In any event, if the franchisor discloses details regarding franchise earnings, or if they have decided to conceal the truth by engineering date, the franchisee is able to calculate and evaluate the profitability potential of the franchise; this process can be conducted with the aid of a financial advisor as well.
Profitability estimation is conducted through royalty payment information every franchisor is obliged to reveal to the candidate franchisee.
How to estimate the profitability of a franchise?
- Firstly, attain the total amount of royalty payments received by the franchisor through all the current franchises, in the course of the previous year.
- Make note of the royalty payment rate. This is the percentage of gross sales that the franchisees are obliged to pay.
- Unearth the number of full-time franchises and divide that number by the royalty payment total to come to the average royalty payment amount.
- Finally, divide the amount of average payment by the rate of loyalty. This will drive you to the average gross sales of each franchise.
What franchises to invest in?
Before discussing the least profitable franchises 2019, let us talk about what are the most convenient franchises to invest in.
Below, we have shed light on the most popular franchising business with the most revenue.
Read on to learn more about the most profitable and at the same time, do not require a great amount of initial investment.
When it comes to franchising, oftentimes fast food franchising comes to mind. Even though an immense segment of the world of franchising is formed by restaurants and the food industry in general, experts hardly advise such a franchise for rookies.
Commonly, in the world of franchising restaurants demand almost the highest level of initial costs.
Simultaneously, these businesses hammer the most revenue. “There are a lot of moving parts and specialization in food,” explains Alex Cunningham, a business consultant concentrated on boosting profits of the franchisee. “I would strongly recommend a background in the industry.”
Pursuant to a food franchising review announced by Franchise Business Review, in the food franchise business, 51.5% of the franchises make a profit of less than $50K in one year, and approximately 7 percent of franchises exceed $250K in one year, and the average amount of a restaurant franchise profit comes approximately to $82K.
These figures do not seem so discouraging but only until you add in the amount of initial expense.
In spite of the fact that a number of simple restaurant franchises cost somewhere less than $100K to begin, a great chunk of well-known brands demand up to the shocking number of $500K to start.
At the same time, opening an independent restaurant may cost as much as $1 million or even more initial investment.
Business consultant Cunningham believes that mobile franchising is only suitable for a specific sort of entrepreneur who is more than comfortable to run a single-person procedure.
In his words, one has to be willing and aspire to be the chief cook and the bottle washer at the same time.
Be that as it may, mobile franchisee services require remarkably less investment than other sorts of businesses.
One does not have to commit to a five-year contract for a location. The entrepreneur does not start out with labor expenses for anyone else other than themselves.
The franchisee may have to purchase a vehicle, but they can redeem for that over time.
And even more, the franchisee is able to achieve an impressive amount of profit from running a mobile business, and there is even the potential to earn a six-figure revenue.
But of course, there is an underside to this. Cunningham believes that at the time of running a mobile business, in order to succeed, the franchisee needs to be active and also own a sales and marketing mentality.
Entrepreneurs who lack the business prospect will be experiencing a difficult time.
Personal-service Sector Franchising
Agency type businesses, such as maid services and home-based healthcare, (in which, the franchisee perform as a hub for independent entrepreneurs), are the most popular area of franchising at the moment.
In particular, home-based healthcare, is in great demand among mobile franchises, primarily because the young generation prefers to stay at home rather than working outside, for as long as they can.
Moreover, they are choosing home-based nursing care and assistance rather than going to assisted-living organizations. But another reason such franchises are so famous is due to the profit margin. Based on a report from Franchise Business Review, the average profit gained by senior-care franchises is almost $99K yearly.
According to Elgin of FranChoice, the average investment amount for senior care is a number less than $100K, and in one or two years, these franchises have the potential to gross $1 million or more.
These types of franchises are strongly the most profitable franchises anyone can invest in. then again, there is catch to all of this glory: these franchises require an immense amount of marketing.
Least profitable franchises
After having discussed the most profitable industries in the franchising business, we shift our focus to the least profitable franchises 2019.
In the following, we will take a look at the top 5 least profitable franchises 2019 in three different categories of High Investment, Medium Investment, and Low Investment. Let’s take a look at this data gathered and published by Forbes.