Brand, location, entrepreneur, timing and employees all play a role in profitability.
he road from startup to profit for a franchise owner can be as straight as an arrow or as winding as a roller coaster. Graduating from the red to the black is a top priority for franchisees the moment they open up shop, but the length of that journey is often determined by unforeseen circumstances.
Much as a newly minted franchisee would like to know how much they can expect to make, franchisors don't have to disclose that information. With so many factors to balance in the equation: brand, location, entrepreneur, timing and employees (to name a few), predictions can be shaky at best.
So how long does it typically take for franchisees to see a profit? "That's the million-dollar question," says Bill Hamam, general manager of MTY Group, which franchises thousands of quick-service restaurants across the country. "For some of them it happens very, very fast — sometimes in month one. Some of them have the normal process of ramping up for up to a year, even 18 months, and anywhere in between. It's very hard to tell."
Hamam admits there really is no telling how long it will take to turn a profit. However, his experience has taught him that the likelihood of success for franchise owners typically comes down to three key factors. "One of the elements is location, the other element would be the brand and the third is how well the franchisee runs their business," he says.
The veteran franchisees, explains Hamam, know firsthand how unpredictable the journey from startup to profit can be, but first-time owners don't always maintain realistic expectations.
MAKE AN ACCURATE PROJECTION
Though significant work is put into accurately predicting the performance of a prospective franchise, franchisees need to prepare for all possible outcomes, explains Kenny Chan, vice-president of marketing and communications at the Canadian Franchise Association (CFA).
"I think the business plan helps with allowing [franchisees] to have realistic expectations," he says. "Typically a franchisor will provide a pro forma financial for you, and you can use those in creating your projections for your business plan to see if that opportunity is right."
"One of the common traits of success that we hear from our members is that franchisees that are actively involved and put sweat-equity into their business are typically successful."
- Kenny Chan, Canadian Franchise Association
Chan adds that franchise experts from major banks and accounting firms can help franchisees develop a financial strategy and business plan, and provide ongoing financial management support.
"When you get the pro forma and financial statements, it typically outlines the costs, obligations, things like that. It will give you an idea of ongoing royalties, and any other kind of contributions that you need to make — like sometimes there's a national advertising fund that you need to contribute to. Based on those numbers you can figure out what additional business expenses you're going to have, and project your various scenarios."
It is impossible to know the length of time it will take for franchisees to break even before that franchise location opens its doors. That's why Chan suggests that building a business plan alongside a financial professional with franchising expertise will provide the most accurate projection.
Chan also advises franchise owners to invest in a brand they are passionate about, and prepare to put lots of work into their business.
"One of the common traits of success that we hear from our members is that franchisees that are actively involved and put sweat-equity into their business are typically successful," he says. "It's not like you buy a franchise and it will ultimately make money for you. You buy a franchise, and it's your business; you've got to run your business."
| KEEP AHEAD OF THE CURVE |
While there is no crystal ball to tell franchisees when their business is going to boom, there are ways to support profitability: • Seek professional assistance from franchise specialists • Choose a brand you’re passionate about • Be prepared for unanticipated expenses • Know the neighbourhood demographics inside and out • Don’t outsource the hard stuff: run the business yourself or find a partner • Ask other franchisees for advice • Create a detailed business plan and stick to it • Don’t invest more than half of your net worth into the company • Manage your own expectations |
This content was produced by The Globe and Mail's advertising department. The Globe's editorial department was not involved in its creation.