Mark Ford: The do’s and don’ts of franchising

Mark Ford

From Mark Ford, editor, Creating Wealth: Forbes worked with researchers at FRANdata, an agency that collects data on franchises, to rate more than 3,000 franchises.

Excluding brands with fewer than 20 locations, researchers analyzed such metrics as size, growth rate, continuity rate, and so on. They also analyzed
performance, transparency, and “lender friendliness” (which has to do with the financing process).

They broke the field into three investment categories:

  • Franchises that cost up to $150,000
  • Franchises that cost from $151,000-500,000
  • Franchises that cost above $500,000.

And, indeed, they found that the cost of a franchise didn’t necessarily make it a good “buy.”

This makes sense to me.

The cost of buying a RadioShack franchise, for example, was as much as $607,351. But the company has been unable to compete in the marketplace. In 2015, it
declared bankruptcy and closed more than 1,100 stores.

Forbes' Top 10 Franchises by Investment Category
Forbes' Top 10 Franchises by Investment Category

So, to make a franchise work for you, there are many factors to consider. And cost is only one of them…

  A survey of 28,500 franchisees for Franchise Business Review’s “Top Franchises 2015” report found that the median annual pre-tax income for the
group was under $50,000 per year.

But then the Review looked at the top 200 franchises on its list—a rating based on such factors as financial opportunity, training and support,
and product development.

And they found that, on average, the franchisee incomes within the top 200 were 15-20% higher than the incomes of the other franchisees. They also found
that the franchisees in the top 200 were 20% more likely to earn at least $250,000 per year.

So it does seem that, with the right franchise, it is possible to make really good money, especially if you have more than one location. (I knew a guy who
had about a dozen McDonald’s franchises. He made a ton of money, hundreds of thousands of dollars, as near as I could tell. Keep in mind, though, that a
McDonald’s franchise isn’t cheap.)

That said, I did find a survey of 6,000 franchisees with three or more locations. They had a median annual pre-tax income of $88,000. About 29% of them
earned more than $150,000, and 16% earned more than $250,000.

  Eighty-eight grand isn’t bad, but it’s not amazing, either. Still, I like the fact that nearly a third of the group earned more than $150,000. Being in
the top third doesn’t seem like an impossible target.

To be in the top third of any business, you must, of course, know what the heck you are doing. Despite the support you may get from the franchise company,
it’s always better to have some personal experience in the industry.

The restaurant industry, for example, has a dizzying number of moving parts and variables. So, don’t invest in a restaurant franchise if you don’t have any
experience in the restaurant business.

And while you’ll need to stick to the franchisor’s marketing plan, you should also understand enough about marketing to be able to tailor the plan to your
particular needs and location.