Are franchises profitable?

The question "are franchises profitable" is challenging to answer because the amount of profit your franchise business returns depends on several factors. In some franchise sectors, 99% of those franchises succeed and have longevity, while the success rate is lower in other franchise sectors.

Ultimately, there's no "one-size-fits-all" solution to seeking out the most profitable franchises in Canada.

But there's one thing for sure: franchises require genuine dedication and hard work to make them a success, and failure is roughly comparable to independent companies.

How quickly can you recoup your initial investment?

Investing in a franchise often results in a faster recoup of your initial investment because you inherit the business's operational model.

This means you open your doors with a company that has already proven popular with an established client base. They have an operational supply chain and a portfolio of products and services that have been precisely honed to the target customer demographic.

How to choose a successful franchise

The success of your franchise is down to choosing:

• The right location, and
• A business that knows its client base

Additionally, you’ll only become a successful franchisee with a strong work ethic and good business instincts.
One of the most appealing facets of franchising is its flexibility — and finding the right franchise to suit your work ethic, interests, mentality, and drive is key to surer success.

What do the most profitable franchises have in common?

While there’s no single exhaustive list, the most profitable franchises tend to have:

• Efficient and effective processes that adapt well regardless of location. This gives customers a clear idea of what they can expect from the brand.
• An adaptable product or service that moves with changing customer trends.
• An operational system that supports expansion — an off-the-shelf operating model that accommodates the needs of individual franchisees.
• An established rapport with a loyal customer base that knows and loves the brand — especially in the event of financial or business downturns.

While this isn’t an exhaustive list, franchises that demonstrate these attributes are likely to be the most profitable franchises in Canada.

How Much Money Will I Make?

Well, isn't this the million-dollar question?

And while it's impossible to determine a specific figure, it's essential you research your chosen franchise system before you sign on the dotted line.

To help with your research, we’ve listed some key considerations that could guide you towards a positive investment.

Get hold of the Franchise Disclosure Document

The Franchise Disclosure Document (FDD) details everything you need to know about investing in your franchise, from understanding the typical income/overheads to recognizing your obligations and the more subtle terms of your agreement.

Your franchisor should provide the FDD at least two weeks before you're due to sign on the dotted line. This means you have a clear understanding of the type of relationship you're getting into and the amount of money you can reasonably expect to make.

Look specifically at Item 19 — the section for earnings. This section is also known as Financial Performance Representations (FPRs).

What will the Financial Performance Representation provide?

FPRs provide a clear picture of your likely profitability. Although it’s widely recognized that no franchise agreement can guarantee you’ll make a specific figure.

Bear in mind that FPRs aren't legally required in the FDD. However, many franchisors choose this level of transparency at the beginning of the partnership.

Transparency is always a good sign of a reliable potential partner.

Examples of Financial Disclosure

Here are two examples of financial disclosure.

The first is an Actual Average and Median Annual Revenue report of Franchised Units.

The second demonstrates an Adjusted Average and Median Operating Outcome of five franchises for one year.

Actual Average and Median Annual Revenue report of Franchised Units

This first report represents the actual average and median revenues of franchised units, taken from franchises that have been operating for 1 to 7 years.

The disclosing franchisor stated that the actual average and median annual revenues expressed here don't reflect the cost of sales (or other fees deducted from the revenue to obtain a net income/profit) or the operating expenses. They recommend that all prospective franchisees conduct independent research into the expenses and costs they'll incur while operating their specific franchise.

Adjusted Average and Median Operating Results

The second example provides insight into the adjusted average and median operating outcomes of five franchises. This spans the duration of one calendar year.

The franchisor providing this data confirms that these franchises have been operational for an average of 8.6 years.

Revenue does NOT equal profit

What’s clear from this second example is that revenue is not the same as profit.

Revenue is the total income coming into the business. Of course, this includes sums that go immediately back into the company for stock, maintenance, and operational functions.

Profit is the revenue minus the operating costs.

So, if a franchise brings in $400,000 in a year in revenue but they have to pay out $250,000 in costs to supply services and products (and keep the business ticking over), the profit is:

What are operating costs?

It’s essential that you have a clear idea of your franchise’s operating costs. These include:

• Inventory purchases — to facilitate the supply of products and services
• Office space — rent, maintenance, insurance, property taxes
• Personnel fees — salaries, promotional fees

Remember that operating costs tend to decrease significantly after the first year of operation. The first year of any business demands considerable cash flow to set up the infrastructure.
Subsequent years tend to stabilize in terms of operating costs.

Should you consider the profitability of a franchise?

Quick answer: yes, of course. Longer answer: it depends.

The quick answer is you should absolutely aim to find a franchise business that is likely to turn a profit — otherwise, you’re working for nothing (and no one wants to do that).

But there’s a caveat here:

You should choose a franchise based on your interests and ambitions.

Choose a business sector that puts fire in your belly.

You want every day of your working life to feel as enjoyable and satisfying as possible — so keep an open mind when considering which industry is suitable for you.

Then:

Do the research. Find out if your local area can support your proposed franchise venture.

Consider local need over popularity

While most prospective franchisees consider popular brands a surer path to success, it's also essential to bear in mind the local need and hunger for the product or service.

Otherwise, you're selling sand to the Arabs.

Which would you choose from the following three options?

• Franchise A — fast food sector, long history of successful sales, strong international presence
• Franchise B — children’s education sector, in business for more than 30 years, operates solely in Canada.
• Franchise C — fitness sector, in business 10-15 years, operates in 15 countries.

Based on those facts alone, which would you choose? Jot down your choice.
Now, let’s consider some financials:

Franchise A —

• Total revenue — $1,115,900
• Operating costs — $963,390
• Profit/income — $152,600

Franchise B —

• Total revenue — $889,413
• Operating costs — $646,486
• Profit income — $242,947

Franchise C —

• Total revenue — $454,200
• Operating costs — $315,300
• Profit income — $138,900

So, here we establish that bigger isn't necessarily better. You'd think the fast food business with international reach would bring in the most profit because it has the most significant worldwide client base.
But:

Franchise B is the smallest business of the three, operating in just one country. But the profits are higher despite lower overall revenue.

Location, location, location. Every time. Location is probably the most critical facet to consider — probably even more important than the service or product you'll be providing.

So, before you finalize your franchise decision, consider the following:

• What are the construction, renovation, and fitting costs for your business premises?
• How much is the lease? Leases often represent a significant outgoing that eats into your profits.
• Is your unit in a location that gets enough footfall to attract customers?
• Is it simple to enter/exit the property? Is it off-road? Will your clients need to climb stairs to enter? What about disabled access?
• Is there an adequate local population to enjoy your service or product?
• What about your local competition? Will you be in direct contest with established companies? Does your franchise offer an attractive alternative?

Always ask questions!

Talk to your proposed franchisor. A good relationship is critical for success. Never be afraid to ask questions.

But don’t just rely on the franchisor for answers. The franchise's FDD should include contact details for other franchisees — speak to them and get the lowdown on how the franchise agreement works for them.

Some great questions to ask other franchisees:

• How much was their total initial investment?
• Was the total initial investment the same as stated in the FDD?
• How long did it take to turn a profit after opening your franchise?
• Do you have consistent and stable yearly profits?
• How supportive is the parent company? Do they get involved a lot?
• Do you buy items from the franchisor as part of the agreement? Do the rates feel competitive? Could you get better rates elsewhere?
• If you could turn back the clock, would you still invest in the franchise system?

The franchisee you speak with may not be authorized or wish to discuss finances with you. But you can still get a good idea from your conversation whether they’re happy with their agreement.

What are the most profitable franchises in Canada?

Of course, any franchise sector can succeed if you're prepared to put in the hard work. But some Canadian franchises tend to bring in greater profits than others.

According to IBISWorld, the most profitable industries that offer franchises in Canada are:

• Hospitals
• Learning centers
• Telecoms
• Fuel sales
• IT Consulting
• Food businesses
• Convenience stores
• Health & beauty
• Fitness

Wrap-Up: What to look for in a compatible franchise

Franchise industry expert Joel Libava recommends looking for three facets of a franchise business:

1. They provide a top-notch service or product
2. They have an effective and functional marketing identity
3. The parent company focuses on ensuring franchisees are making money

Top tips for finding your profitable franchise

• Look out for internal press releases announcing franchisee milestones
• Research good news relating to the business
• Research bad news pertaining to the business
• Explore the parent company’s website intently. Find out as much about them as possible.

Check our articles and blogs for more top tips to help you find the right franchise for you. Thanks for reading!