What a franchisee can expect to earn
Buying a franchise can be a massive leap of faith for someone who is used to earning a salary. Owning your own business means paying salaries, rent, and other company expenses before paying yourself. One of the factors to research when considering different franchise opportunities is how much a franchise owner can make in that franchise.
The franchisor is the first source of information to ask how much a franchise owner makes. The franchisor should provide the franchisee with a Disclosure Document containing financial projections. When reviewing this information, check whether the franchisor made provision for a franchisee’s salary. If not, this amount should be added to expenses for a realistic view of franchisee earnings.
Other franchisees are the second source of information provided in the Disclosure Document. Their contact details should be available in the Disclosure Document, and the franchisee may contact them with questions about the franchise.
Potential franchisee earnings:
It’s good practice for a franchisee to draw a market-related salary from the business. The salary should cover the franchisee’s living expenses while leaving enough free cash flow in the business to cover all costs. There may be months when it’s not possible to draw this salary, and working capital may cover shortfalls when needed.
Profits emanating from the business
The main reason a franchisee would buy a franchise is to benefit from potential profits generated by the business. Profits vary between industries and even within the same company because of factors like seasonality and economic fluctuations. The Disclosure Document should provide the franchisee with an indication of potential profits.
Capital gain upon selling the business
Provided that the franchise implements sound management and their best efforts to maximise growth and profits, they stand to gain a considerable amount when selling the business. A profitable business should sell for substantially more than the purchase price. Ask the franchisor if there is a specific prescribed formula for valuing the business. The capital gain that can be realised from selling a business will also influence how much a franchise owner makes.
Sound financial management
A franchisee could consider the following practices to contribute to sound financial management and discipline when it comes to franchisee earnings:
- Pay a monthly franchisee salary that is similar to that of a store manager to cover basic franchisee living costs
- Register the franchisee for PAYE to ensure tax compliance and to avoid large lump sum payments when it’s least expected
- Discuss the distribution of profits with an accountant for advice on dividends, bonuses, and tax implications
- Keep track of the owner’s contributions to the business and discuss the structuring of a loan account with an accountant
- Ensure that both the franchised business and the franchisee remain up to date with tax payments to avoid penalties