The profitability of a franchise depends on many factors. As with most other investments, higher investments yield higher returns. Fast food franchises are performing well in the current environment but tend to require higher investments from R1.5 million upwards. Here are some factors that will influence the profits of a franchise:
- Industry
Some industries have high-profit margins from the inception of the business. These are generally cash businesses that achieve positive cash flow faster, such as fast-food restaurants. The downside, as mentioned, is that these franchises for sale tend to have a high investment level. For example, a KFC franchise will sell for a price upwards of R5-6 million and is also challenging to obtain, with preference given to existing franchisees.
- Investment Level
Typically, the higher the investment, the higher the profit potential, as is the case with fast-food franchises. Other franchises with high investment levels include speciality retailers and certain automotive franchises such as panel beaters. Many of these franchises may take a while to achieve positive cash flow but expect high returns after the first year of trading.
- Product versus service franchises
Generally speaking, product-based franchises are more profitable than service franchises, especially in the Business-to-Business category. B2B or Management Franchises usually rely on the franchisee providing professional services to other firms and are limited to the time a franchisee has available to “sell”. Service-based franchises will be suitable for those looking for a non-retail franchise with no weekend hours. Service franchises can be lucrative but may take longer to reach profitability, depending on the business model. Franchises that provide a combination of products and services, such as Beauty Franchises, can be very profitable if they build a solid customer base and upsell products to customers.
- Innovation and uniqueness of the franchise
Some franchises are so unique that consumers flock to them, and they generate substantial profits quickly. Brands that achieved this when they launched include Nando’s and Rocomamas. As more competitors enter the market with similar offerings, this benefit tapers off, but having a first-mover advantage can result in substantial consumer support.
- New versus existing franchises
A new franchised outlet will take some time to draw customers as they need to raise awareness of their location and offers. An existing franchise will have a customer base and a proven track record with verified financial results. Such a franchise may be an attractive investment to those franchisees that seek to reach profitability faster but will come at a premium price.
Franchisors should provide franchisees with an indication of potential profits in the form of financial projections included in the Disclosure Document. While financial projections will give a potential franchisee an indication of profitability, the success of a new franchise depends on the franchisee’s efforts, the potential of the chosen location and the brand’s strength.
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