I wish I had known what a profitable franchisee looked like.
Recently a colleague of mine asked “but all franchisees are profitable, aren’t they?”
My answer was – “it depends who is asking the question!”
You see there are so many people involved in the franchise industry, so many different players that one person’s definition of a profitable franchisee can be quite different from another’s.
Let me explain…..
To a banker, a profitable franchisee is one who pays their loan on time and in full and comes back to refinance when they need a new store fit out. The bank provides their Eftpos facilities and operating bank accounts as well. So from that one client the bank makes a lot of money therefore they are referred to as a “profitable franchisee”.
To a franchisor, a profitable franchisee is one who has a large turnover and does not need a lot of support. The franchisor earns their royalty percentage on every dollar the franchisee turns over. So if the franchisee is a good operator and does not need a lot of support then the franchisor has a good income with very little expense so therefore they view them as a “profitable franchisee”.
To a Landlord a profitable franchisee is one who pays their rent in full on time. A tenant, who opens during core hours, has a vibrant marketing campaign and is a good retail citizen. The tenant pays an increase in their rent each year in accordance with their lease conditions, usually level with CPI. The tenant renews their lease at the end of the term for more than they were previously paying and agrees to do a store refresh upon renewal. Therefore, to the Landlord, this sort of franchisee is a “profitable franchisee”.
But to a franchisee, what is a profitable franchisee?
A person who operates their franchised business within the business model they purchased and after paying suppliers, employees, landlords, franchisors and their bankers are left with at least more than what they would earn if they were an employee in their chosen field.
So as you can see there are many definitions of a profitable franchisee. Don’t be led into the false misconceptions that franchisees are profitable and look deeper into who is asking then answering this question. Think about where they would see their profit coming from.
It is very important when buying a franchise to do very detailed research that looks into all areas of the franchise agreement and disclosure document. Most importantly any prospective franchisee should do extensive budgeting on all possible scenarios of the business model to work out what profit they can really expect. Don’t just rely on advice from your banker, franchisor and landlord, because as you can see, you are profitable to many of these parties just by signing the franchise agreement and beginning to trade.
To learn more about becoming a franchisee, do our free Franchisee Pre-entry Program kindly supported by the ACCC.