The concept of owning a franchise appeals to many budding entrepreneurs because of benefits like utilizing a proven business model, training and support, brand name recognition as well as assistance with marketing. As with any investment, you, as a potential franchisee, are naturally concerned with profitability, success rates, and return on investment (ROI). Let's delve into these critical points to better understand the franchise concept.
Profit Potential
At first glance, owning a franchise may appear to be a shortcut to profitability. After all, you're leveraging an established brand name, a tested business model, and often a dedicated customer base. However, profitability isn't guaranteed and varies widely based on several factors. Franchise success rates depend on the specific brand, location, operational efficiencies, competition, and the overall market demand for the product or service. While some franchisees achieve significant profitability within their first year of operations, others may take several years before realizing a substantial profit. Thus, while the framework for success might be in place, profitability often boils down to the franchisee's ability to efficiently manage and optimize the business.
Franchise Business Success Rate
Owning a franchise does not guarantee success. While the franchisor may provide the blueprint, training, and ongoing support, the daily operations and management responsibilities fall squarely on you, the franchisee. Success in franchising, as in any business, requires hard work, dedication, good decision-making, and adaptability to changing market conditions. Keep in mind that factors such as location selection, local competition, and community engagement play crucial roles in determining the franchise success rate.
To give you a better idea of small business success in the United States, according to the U.S. Small Business Administration (SBA), there were more than 31 million small businesses registered in 2020. Based on information from the U.S. Bureau of Labor Statistics , 82% of small businesses survive one year, 50% survive to the five-year mark, and just 35% survive 10 years.
There’s no consensus on franchise success rates. There used to be “The Stat,” statistics thrown around saying there was a 95% success rate with franchises. However, the International Franchise Association (IFA) and the SBA say those numbers are not supported and are invalid.
What you can count on is that the industry is growing. In the IFA’s 2023 Economic Outlook , the overall number of franchise establishments is expected to increase by almost 15,000 units in 2023, or 1.9%, to 805,000 units in the U.S. The industry is anticipated to add approximately 254,000 jobs in 2023 — growing at a rate of 3.0%, and total franchise employment is forecasted to reach 8.7 million this year.
The total output of franchised businesses — the measure of total economic activity in nominal dollars — will increase by 4.2% to $860.1 billion in 2023.
The growth of franchising is largely attributed to the appeal of the model itself, which includes a structured support system provided by franchisors, training, marketing assistance, and operational guidance. That said, it's essential to remember that "success" is subjective. For some, it might mean turning a profit rapidly, while for others, it might be achieving long-term sustainability and growth. The metrics of success can differ from one franchisee to another.
Anticipated Return on Investment
The average ROI for a franchise can be a tricky figure to pin down due to the vast differences in initial investment costs, ongoing fees, and operational expenses across different franchise models. For example, a quick-service restaurant franchise might require a higher initial investment when compared to a home-based franchise, but the potential revenues could also be substantially higher. Generally, potential franchisees should examine the Franchise Disclosure Document (FDD) provided by the franchisor, paying special attention to Item 19. This document contains crucial financial data, including potential earnings, which can help in calculating a projected ROI. It's also advisable to engage in discussions with current and former franchisees to gain insights into their experiences and ROI timelines.
Determining the Success of a Franchise
While the success of a franchise often depends on individual management and external factors such as location and market demand, certain sectors have historically outperformed others. For instance, while the fast-food industry has experienced success, trends are showing sectors like health and wellness, education, and home services have also been on an upward trajectory, particularly in the wake of changing consumer behaviors. In the IFA Economic Outlook Report previously mentioned, expectations show service-based industries are projected to witness higher growth than other industries.
But Wait, There’s More
If you're contemplating diving into the world of franchising, consider more than just the numbers.
- Assess your compatibility with the franchisor's corporate culture and values. This alignment is essential for a harmonious and productive relationship.
- Consider the level of support the franchisor offers, not just in the initial stages but throughout the life of the franchise agreement. Training, marketing support, operational guidance, and innovation are pivotal for sustained success.
- Always remember that while the brand name might be established, the on-ground effort, dedication, and management will determine the success of your specific franchise unit.
Consider the ServiceMaster Restore Franchise
We have been leaders in the restoration business for more than 65 years because of our integrity and commitment to high standards for our customers. When a home or business owner has experienced damage, destruction, or loss of their property, they want a trusted name to help restore their lives to normal as quickly as possible.
As a home service franchise owner with ServiceMaster Restore, you’ll be part of a growing industry with increasing customer demand. But our franchise owners are drawn to us because they have a deep sense of service and want to help folks in their community in their time of need.
If you’d like to learn more about ServiceMaster Restore, to get started , fill out our online form and we’ll be in touch.