5 Key Numbers to Check When Looking at Franchise Options

When considering investing in a franchise, it’s crucial to look beyond the surface and dig into the numbers. This helps you determine whether a franchise opportunity is financially viable and aligns with your goals. Here are five key numbers you should examine before making your decision.

The franchise fee is your entry ticket. This is a one-time payment that grants you the rights to operate under the franchisor’s brand, access their systems, and receive training and support. The cost can vary significantly depending on the brand and industry, ranging from a few thousand dollars to hundreds of thousands.

Be sure to assess whether the initial fee aligns with the potential profitability of the business. Higher fees might indicate a stronger brand presence and more comprehensive support systems, but make sure you’re not overpaying for the brand alone.

Most franchises require ongoing royalty payments, typically calculated as a percentage of your revenue or as a fixed monthly fee. This cost covers continued support from the franchisor, brand advertising, and access to new training or tools. The royalty rates can range from 4% to 12% of your revenue, though some franchises may charge higher.

It’s essential to understand how these royalties will impact your bottom line. High royalty rates might eat into your profits, especially in the early stages when you’re trying to grow the business. Compare royalty structures across various franchises to find the best fit for your revenue potential.

Beyond the franchise fee, the total initial investment encompasses everything needed to get your business up and running. This includes equipment, real estate, licenses, insurance, and marketing costs. Some industries may require a hefty investment in specialized equipment or physical locations, while others may have minimal startup requirements.

Understanding the total upfront investment is crucial to ensuring you have adequate financing or access to capital. Carefully compare the projected costs with the potential revenue and market demand in your area to determine if the investment makes sense.

One of the most important numbers to consider is the average revenue generated by franchisees within the system. Many franchisors provide this information in their Franchise Disclosure Document (FDD), but it’s also worth speaking with current franchisees to get a real-world perspective.

This number gives you a sense of the business’s potential profitability. Make sure the revenue figure aligns with your financial goals and lifestyle expectations. Keep in mind that revenue can vary depending on location, competition, and local market conditions, so don’t rely on average figures alone.

The success rate of current franchisees can offer valuable insights into the viability of the business model. A franchise with a high success rate indicates strong support, a proven system, and a favorable market position. Conversely, a low success rate may suggest challenges within the system or in the market.

Look for data on franchise closures or terminations over the past few years. If possible, reach out to former franchisees to understand why they exited the system. A high exit rate could be a red flag, signalling potential problems in the franchise model or support structure.

Investing in a franchise can be a great way to become a business owner, but it’s essential to evaluate the numbers to ensure you’re making a sound investment. By carefully examining these five key figures—initial franchise fee, ongoing royalties, total investment, average unit revenue, and franchisee success rates—you’ll be better equipped to choose a franchise that aligns with your financial and personal goals.

Taking the time to do your due diligence upfront can save you a lot of headaches down the road, helping you select a franchise that offers not just an exciting opportunity but also a stable and profitable future.