According to the British Franchise Association (BFA), 97% of franchises claimed profitability and less than 1% closed due to commercial failures in 2018 alone.
These figures clearly indicate the strength of the franchise business model. If you are an aspiring entrepreneur considering investing in a franchise opportunity, one of the biggest questions you’ll have is: how long does it take to reach profitability?
That’s the question we answer in this article, while also considering the factors that impact a franchise business’ profitability, aspects related to franchise success and more. Let’s begin.
How long does it take for a franchise to be profitable?
There are over 100 franchise industries in the UK and hundreds of more sub-categories and franchise businesses under each industry.
Because of their multiple differentiating factors, such as whether they are product or service based, their size, location, etc., it is challenging to provide an answer to the question of how long does it take for a franchise to be profitable.
However, industry research points out that it can take anywhere from one to two years to reach franchise profitability.
What factors impact a franchise’s time to profit?
Answering the question of when one can reach franchise profit will depend on each individual franchisee. However, there are numerous factors that impact franchise success. We cover some of the most important ones in more detail below:
- Initial franchise fee: Practically every franchise opportunity requires franchisees to pay an initial franchise fee that gives them the rights to tap into and use the brand and operate under its umbrella. This initial franchise fee can range from a low investment that’s a few thousand pounds or a high investment that is a few hundred thousand pounds. If you have secured the franchise fee through savings, you won’t have to worry about repayments. However, if you are planning on borrowing from a financial institution, you will need to consider your monthly repayments plus interest over the foreseeable future.
- Royalties: Another important element that goes into determining franchise profitability is the royalties charged by your franchisor, either as a percentage or a fixed cost of your gross sales. Every franchisor’s royalties percentage differs from the next, and your chosen franchise’s royalty payments should be factored into your monthly expenses. Once these are deducted from your total sales, you can determine if you are reaching a break-even point or you’re operating at a profit or loss.
- Fixed and variable operating costs: Examples of fixed operating costs, apart from the repayment of the initial franchise fee and the royalties that you’ll need to subtract from your business’ monthly revenue, include premises, salaries and wages, utilities, inventory, computers and/or equipment, and others. Variable operating costs are those that are not fixed in stone and paid on a monthly basis but which nonetheless add up over time as unexpected or unplanned expenses.
- Business taxes: There are also business taxes to consider subtracting from your bottom line, and these will depend on the nature of your franchise business. Value-added tax (VAT) is a given component that you will necessarily need to include in your expenses column.
- Sales and revenue: All of the factors above will add onto the total value of your sales and revenue and will need to be subtracted from these to determine if you are reaching a franchise break-even point. This point is reached when your total revenue and total expenses (both fixed and variable) amount to zero. Anything over zero is considered your profit while anything under zero is considered a loss.
- The franchise business model: The franchise business model also plays an important role in how quickly you reach profitability. For example, if you are selling a product to your customers, you’re more likely to reach profitability faster than a membership-based business model such as a fitness centre or a gym. That’s because it takes customers longer to decide whether they will continue paying you for your service over a longer period of time.
- The industry and market: The industry and market you’re operating within will also determine the success and profitability of your franchise venture. For instance, an industry that is more recession-resistant is more likely to thrive during hard economic times than one that offers luxury products or services or which are seasonal.
- Local competition: Another factor you need to consider is the local competition. If there are other businesses in the area in which you’re operating that offer the same product and/or service as you, you will need to work harder to convince customers to choose to buy from you instead of the competition. The opposite is also true. If you’re running your business in an area with high foot traffic, for example, and low competition, you are more likely to reach your sales targets faster.
- The strength of the brand: The strength of the brand plays a crucial role in attracting and retaining customers. If you operate under a well-established brand, you are more likely to have less trouble in securing customers than a brand that is still quite young and needs to prove itself.
- Marketing: Marketing is an essential element in franchising because it raises awareness about the brand and plays a key role in attracting new customers or retaining existing ones. In franchising, there is a frequent practice for franchisees to pool their resources together into a common marketing fund, which the franchise headquarters then uses when implementing a local, national or international marketing strategy. Often, the marketing fund is funded either as a percentage of total sales or as a fixed monthly fee. This fee needs to be taken into account when you are working out your break-even or profitability point.
- The franchisee’s role and the number of employees: The final factor to consider is your role as a franchisee in the business. Will you take on the full-time role of running and managing your business, for which you need to set aside funds to pay yourself, or will you hire a manager to run the business for you? In the latter case, you will need to pay them a monthly salary, which needs to be deducted from your total revenue. In addition to your manager, you also need to factor in employee hiring and retaining costs, which can add up significantly and will form a part of your fixed monthly expenses.
What is the success rate of a franchise?
As mentioned earlier, the success rate of a franchise in the UK is quite high and stands at around 97%. This is because many UK franchise opportunities are solidly established within their industries, following a tried and tested business model that’s proven to be successful. However, as with all things in life, franchise buying does not guarantee success and you need to make sure that you are fully committed to the journey ahead over the long term to see your venture succeed.
What can you do to reach success sooner?
Whether you are choosing to buy a new franchise or you’re considering franchises for resale, there are a few important lessons to be learned about reaching profitability sooner. Based on thousands of lessons learned from franchises, it’s advisable to:
- Invest in a well-established and well-known brand
- Choose a franchise business model that is aligned with your skills and abilities
- Choose a franchise whose products or services will remain in demand over the long term
- Be prepared, patient and realistic about your expectations
- Focus on effective marketing and customer acquisition strategies
- Streamline operations and optimise resource management
- Continuously analyse areas of your business where you can make improvements
Why is a franchise less likely to fail?
With a 97% success rate, it’s been proven that franchises are less likely to fail. Some of the reasons behind this include the fact that you’ll be investing in:
- A well-established brand
- A proven business model, and
- Receive training and ongoing support
Conclusion
The importance of investing in a well-established franchise brand such as the Belvoir Group cannot be underestimated. This is one of the most important elements that should guide your decision-making process as you embark on the road to franchise business ownership.
The benefits of this are enormous. It’s about working for yourself where your customer base is already established. It’s also about working with a proven business model that has stood the test of time.
Investing in an established property franchise brand like the Belvoir Group is certainly the right route to take. Since Belvoir does not offer “cold starts”, every opportunity is a going concern with a trading history. Get in touch to discover more about how this franchise opportunity could set you up for long-term success in the property industry.
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