7 October 2021

    The number one question entrepreneurs ask me is: Is franchising profitable?

    My answer: Yes, but only if it’s done right.

    Let’s examine the facts

    Out of more than 1 million businesses in Canada, approximately 1500 franchisors and over 80,000 franchises are in operation. Therefore about 10% of Canadian companies are “franchised”. Canadian franchises contribute, on average, a total of $96 billion per year to Canada’s GDP, or nearly 5% of the Canadian economy.

    But are these franchisors making money?

    The answer to this question is yes if…

    • If the market is promising
    • If the business model is good
    • If the franchisee selection is well done
    • If the system is well set up to assist the franchisee in his operations
    • And many more…

    A picture is worth a thousand word

    Case: Franchisor ABC
    Investment to become a franchisor: $150,000
    (Franchise agreement, market research, various professional services, marketing, etc. )

    Unit income

    Initial fee per franchise: $35,000
    Royalty rate: 5%
    Average annual income of franchise: $1,000,000

    Number of new franchises per year: 5

    Year 1 Year 2 Year 3
    Initial fee $175,000 $175,000 $175,000
    Royalties $250,000 $500,000 $750,000
    Total $425,000 $675,000 $925,000

    Note: data is not annualized to simplify the example

    Of course, it is necessary to consider the expenses (recruitment, staff, expertise, etc.). As you can imagine, the real profitability will be achieved towards the third year if everything goes according to plan.

    Now do the same exercise with 10 new franchises per year and you will see that the picture changes drastically without linear expenses increasing.

    My message is simple. We must not fall in love with the numbers and jump headfirst into franchising. A successful franchisor is first and foremost a creator of success among its franchisees. This success will allow a more sustained and rapid development and, therefore, more profitability.

    Come to think of it

    An investment of $100,000 to $250,000 (in Canada) to become a franchisor and generate a multimillionaire business in a few years without investing capital for each new branch; does it not pay off?

    There you have it! The business model and money are only 50% of the equation (it was too good to be true!). The other 50% is the secret formula of franchising: Franchise leadership, but that’s another topic.

    Conclusion

    Yes, franchising does pay but only if:

    1. Both parties make money and
    2. The franchisor’s leadership generates value for franchisees.

    Otherwise, the franchise is like a boomerang. When it is poorly done and badly directed, it always ends up hitting us from behind. OUCH!

    Agree or disagree, let me know!  (Comment, this feeds the debate)

    And if you encounter issues that you would like to discuss with an expert who knows your reality since I have lived it as a CEO, I would be more than happy to do so.

    Contact me privately for a free strategic brainstorming session!

    No sales, just a session to reflect together on your growth and get to know each other.

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