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How Do Franchises Make Money

Urvashi Pokharna
There are franchises of major companies at every street corner. They must be certainly making money which is why so many people are interested in starting a franchise business.
You can start a franchise, but you cannot own the company. Did you know? There are over 1500 franchisors in the United States. Every 12th business in the economy is a franchise business.
With franchising, there is the ease of being sure of a certain percentage of profits on your investment, the company's brand name associated with your business, a well-laid out business plan for you and easy availability of equipment, trade secrets and personnel training. But then, there are the costs to pay to the company like start-up fees, royalty, etc.
The initial start-up investment to replicate a franchisor's business, including all costs except real estate, is around $250,000 depending on the company. So, how do franchise owners make money? Well, you can certainly ask around your town's franchise owners about how they increase their bank balances or you could just read it here.

How Do Franchise Owners Earn Money

A franchise operates in the same fashion that an independent business does, except there is a royalty fee to be paid to the franchisor, every month. Make sure you read the Franchise Disclosure Document (FDD) thoroughly as well as the franchise contract and understand all terms and conditions.
Do refer to the item 19 of the Uniform Franchise Offering Circular (UFOC), to know exactly what your earnings are after all costs (labor costs, rent, corporate taxes and others) are deducted from the gross revenue on your financial statements. Ask about the average sales expected per franchise per region, by the company.
All franchises earn money, but the matter-of-concern is how much. Analyze the return on investment which should be at least 10% to 15%. By the 3rd, it should be 30%. Higher your investment, higher the returns!
Set goals for yourself on how much you would like to earn with respect to the money you are putting in the business. However, there are many factors that contribute to the money-making factor of franchises, listed here.

Sell More, Earn More

Apart from the economies of scale and reduction in operation costs, a high sales volume will also increase your earnings on gross revenue even after deducting a monthly royalty fee.
You can earn more by executing the franchise's business plan smartly, expanding the franchise, investing more in the business by plowing back profits or acquiring loans. Be sure you avoid double-taxation and save up the money. Also, if you provide a great customer-friendly service, you will have them returning to your business.

Follow the Business System

Every franchise owner has the benefit of access to the franchisor's original business plan. This means you have a proven plan for making profits! This is exactly why every eighth minute, a franchise business opens up in United States. 
Talk about guarantee of returns. Your task is to only execute the plan and follow the business system. Franchises are the best options when you want to make money in a business but lack entrepreneurial skills.

Capitalizing on Brand Name

The most important source of earning for a franchise owner is the franchisor's brand name in the market. The image that the company has established in the market is directly proportional to the number of customers you will end up attracting to your franchise.

Location of Operation

All franchisors lay down certain rules and specifications for the location of the franchise establishment. They also help franchise owners to select an appropriate commercial location for the franchise business with expert advice.
Even if you were to make a mistake selecting the location, your franchisor will help you avoid making the same.

Benefit of Experience

It's not the first franchise business that you have established under the franchisor, nor would it be the last. The business has already been and is being run by the franchisor and other franchise owners who have gained enough experience from their mistakes to avoid them and earn more money to be successful.
A franchise owner has the benefit of the experience of mistakes made by others and the business tactics used by them to earn higher profits. In a franchise business, nobody tells you that you cannot duplicate those techniques to your business.

Zero R&D Costs

An independent business owner has to constantly innovate and be creative to attract more customers and keep them. Also, you need to keep yourself abreast with all the latest developments in the industry and imbibe them into the business.
But, a franchise owner does not have to invest money into research and development costs as these are already being taken care of by the franchisor. Imagine having someone come and tell you about the new changes to make in the business to earn more profits, smooth, isn't it?

Minimal Marketing Costs

There are hardly any marketing costs attached to a franchise. You don't have to pay a chunk of your earnings to see your business advertised on humongous billboards, the top magazines or broadcast mind-blowing advertisements on media.
You may not be earning any extra money doing something special in a franchise business, but you are saving up a lot on advertising and marketing campaigns, by paying a small percentage of your earnings, that ultimately generate more customers (read, money) for your business.
If you are planning to start out a franchise business, you must first know how to choose the right franchise business. Find out the top franchises in your state or city to have a clarification on the most profitably running franchise businesses. One of the most popular choices for starting a franchise business is the fast food giant, McDonald's. 
Hotels are also a lucrative franchising business opportunity. But, to be a successful businessman in any industry, you must have the skills to run the company just as it demands you to.