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  • Writer's pictureTim Parmeter

How to Calculate Earnings as a Franchise Owner: Money and the Net Profit Fallacy


woman calculating earnings as a franchise owner

Have you ever felt that your life is flying by? Suddenly, you look up from your desk and years have passed – years that you have spent wasting time in a job you do not like or a career you cannot advance in. 


All too often, we stay in unfulfilling jobs where we are making far less than we are worth. Many people are fearful of making a transition, transforming a side-hustle into a full-time job, or perhaps even keeping your job while running another business on the side. Why? 


We are addicted. We are addicted to our salaries, the paychecks we take home every two weeks from our jobs. 


If money is the thing holding you back from truly committing to another opportunity, it is time to reexamine that concern. In this article, we will discuss the money side of franchise ownership. We will cover how to determine how much money you will make – and probably more importantly, how not to determine that. 


One statistic that seems like a key figure is what is called “net profit.” You will see net profit statistics and percentages everywhere, but they can be incredibly misleading. Knowing which numbers to focus on (and which to ignore) is a crucial part of becoming a franchise owner


Let’s Talk About Money

Today, we are going to talk about money, money, money. There is a phrase that we say often (perhaps even to the point of being annoying), but it is crucial when it comes to money and franchise ownership: The money follows the fit. One more time for the people in the back… 


The money follows the fit.  


What does that mean? You might look at a particular franchise and say “Wow, look how happy those owners are! Look how much money they are making!” When you see a franchise with tons of happy owners who are getting rich, you probably want to jump on board – right? That sounds awesome, sign me up. 


But that is following the money. We have not really considered the fit. 


What if that franchise’s success is really dependent on the owner being great at and enjoying cold calling, going to knock on doors, and going out to generate business for their particular franchise. Now, maybe that sounds like you – in which case, great! It could be the right fit. 


But let’s say you hate cold calling. You are terrible at sales. You do not like people. And maybe you do not even want to be full-time with the business. In other words, you are not aligned with all of the things that are required by that particular franchise. 


If that is the case, you will never, ever get the money that those happy, successful owners are getting. It all comes down to the fit. Those people are succeeding because the brand is the right fit for them. You will not be successful (or happy) as an owner of a brand that does match your skill set, goals, and priorities. 


So, money follows fit. When you start to get close to finding the fit, however, you will want to look at the financial side of things. But what information is the most important?


The Net Profit Fallacy

One thing that will come up often is the phrase “net profit.” It sounds really important, doesn’t it? 


Well, one franchise tells me they can get a net profit of 30%. A certain owner tells me they have a net profit of 25%. Awesome. That sounds amazing. Sign me up. 


But hold your horses for a second. Pump your brakes. 


Here is the truth: Net profit does not really tell us anything. 


First of all, if it is a percentage, we need to find out what it is a percentage of. What is the top line revenue? How did the franchisor get to that net profit? What are all of the things that go into the business to get to that bottom line? 


The bottom line is what we want, but first, we have to do this crazy thing… you may have heard of it… it’s called math. And you cannot do accurate math without understanding the starting point, the top line, and what happens between that and the endpoint of net profit. 


In short, be wary when somebody starts talking to you about net profit. Whether you are speaking with a franchisor or a franchisee, you will hear numbers thrown out: it is this percentage, it is this dollar amount.


Now, does that mean they are misleading you? Not necessarily. If you are hearing from a franchise owner, they are simply telling you facts about their individual business. And that is one of the beauties of talking to a franchise owner throughout the franchise Discovery Process


But unless we see the math, there are a few different ways these conversations can become dangerous. 


Your Costs vs. Other Owners’ Costs

Let's say we have two franchise owners in the same system. They are both making, to use an easy number, $1 million in annual revenue. One of them has a net profit of $100,000 and the other one has a net profit of $300,000. 


That is a big difference – and this is where the math comes in. How do we explain that difference? 


Well, let's say one of them is taking every single expense they can attach to the business and they are running it through there. They are compensating themselves pretty heavily as an owner, which is your right to do


Now, let’s say the other owner is doing none of those things. They are not running any expenses through the business. They are not compensating themselves very much. Maybe they have another business. Maybe they have an additional job. Whatever the reason might be, it is important to understand how owners of the same franchise can yield very different earnings. 



So, the net profit is misleading here because of how each owner is running the business differently and how they are compensating themselves as owners. 


Okay, so how do we work around this? Again, it is called math. What we are going to do is work on figuring out what it costs to run the business. How much money per month? 


It is really no different from figuring out how much money you need for your household. How much does it cost for you to run your household? There is the mortgage. There are all of your utilities. There is the grocery bill. There are the 26 times we DoorDash… or whatever it might be. Add up all of those things. How much do you end up with? That amount is how much money you need to bring in to pay all of the bills so you do not get kicked out of your house.

 

We do exactly the same thing with our businesses. We figure out what our costs amount to. 


Before you become a franchise owner, you will be able to get a good chunk of this information in Item 7 of your FDD (Franchise Disclosure Agreement). It is not the end-all-be-all. It is not everything, but it is a good starting point and can answer some important questions.  


So what is our cost of goods? What is the stuff we are selling, if anything? What is our cost of labor and staffing? What are our fixed costs? Is there rent? What are we spending on marketing? Is there equipment, products, vehicles, or other costs?


Some costs are going to be fixed. Some costs will be tied into the business. Are there things within the franchise? How much are the royalties? Is there a fee for technology


Then, think about your own costs. What costs of yours as the owner are you running through the business? Maybe it is your vehicle, your cell phone, your internet bill, the polo you are wearing. All of those things are now costs to the business instead of items you pay for personally from your own pocket. 


Franchise Revenue and Return on Investment

Another phrase people like to throw out there is “return on investment.” FranCoach clients often ask us, “When am I going to get my return on investment?” 


But really, that is not a very relevant question. After all, you will not get your full return on investment until you sell the business down the road. 


What you really want to figure out is, when do you stop putting my money into this business? In other words, when will the business start to pay for itself? 


Well, let’s talk about how to figure that out. 


First, we find out how much it takes to run the business. Then, we look at the revenue. How do we determine the revenue? 


It could be a food franchise where we know throughout their entire system the average ticket is $12.92. Let’s make it easier by using $13. So, how many transactions do we need to get over the course of the month to pay the monthly expenses, whatever they are? Let’s say those expenses were $30,000. Simple division, right? We get out our calculators and find out that it will take about 2,300 transactions to cover the operating costs. Everything after that is profit. 


The food example is one side of the equation, but many franchises are more project-based. That type of business will have a much bigger average ticket. 


Take a painting franchise, for example, with an average ticket of $6,000. And let’s say it costs $15,000 per month to run the business. Okay, well, once we get three jobs done, three projects done, we have already paid the bills for the business. This is what we want to be able to do. 


Figures like these will help you calculate revenue and profit, some of which you will find in the FDD. But through what is called the “Validation Process,” you are also going to get a chance to talk to owners. The franchisors can share things that are reported by the owners, but no franchise legally can tell you how much you are going to make. 


That means it is on you to determine how much you can make. And you can do that through the processes described above and a little bit of simple math:

 

  1. Find out the costs of running the business. 

  2. Find out the average revenue per month.


Now, when you talk to franchisors, you can get a little deeper. You can ask them how long it took them to get enough customers to pay all the bills, to break even. Did it take them one month? Six months? You can get a cross-section, or average, on that and then make a prediction for yourself based on that data. 


And every dollar past that… is yours! What you do with it is up to you. 


Compensating Yourself as a Franchise Owner

Let’s return to the painting franchise example. It costs us $15,000 per month to pay all the bills and run the business. And our average job size is $6,000. So we will imagine that we have gotten five jobs this month, giving us $30,000 in revenue. Take away the $15,000 of costs, and we are left with $15,000 of gross profit. 


What do you do with that money? Well, you do whatever you want with it. Again, it is yours. At that point, maybe you have run some expenses through the business already. You have your car through the business, you have your cell phone, you have some basic things like that. But you have not actually paid yourself. 


You could, theoretically, take every dime of it out and go to Tahiti for three weeks. You get the point, right? It is your money. You can do whatever you want with it. Now, should you pull every cent of it out and go on a vacation? It is probably not the smartest thing, but you can do it.

 

So as an owner, what is the smart play? Once again, we are going to do some math. What do you need to pay my bills at home? You need to pay the mortgage. You need to buy groceries. You do not have to worry about your car. Your car is being paid for by the business, as is your cell phone. So how much do you need to pull out of there?


Pull out that much, and keep the rest of the money back in the business. Maybe you are reinvesting. Maybe you are saving for a rainy day. Maybe you are saving up to add another territory. 


Resale Example: How the Top and Bottom Lines Can Be Confusing

A few months back, we had a client who was looking at a resale. It was a service-based franchise that had been in business for about 10 years. They had been pretty consistently doing somewhere between $1.5 million and $2 million a year in revenue. But they were showing almost zero on the bottom line. How is that possible? 


This is where, again, things can be misleading. Top line revenue is vanity. It is a good starting point, sure, but it is vanity. What we want to figure out is how do we get to the bottom? 


Well, when we actually went back and had our client do math, what we found out was that the owner was paying themselves (and again, this is all fine to do) a salary of about $175,000 a year. They were also paying their spouse $125,000 – and the spouse was not really doing much in the business. They had four different cars running through the business. Two may or may not have been driven by their kids. They had four different cell phone plans. 


So right off the bat, there is $300,000 just in salaries and owner compensation, plus all of the other things that were flowing through the business. That got them down to looking like they were not really making any money, which, from a tax standpoint, is a benefit for them. 


This is all to say that looking at only the net profit or looking at only the top and the bottom line can be really dangerous. Looking at the top is your starting point, but then we want to do the math.


Get an Advocate With Franchise Industry Experience

If that all sounds a little confusing and overwhelming, you are not alone – figuring out the financial side of owning a franchise can be challenging. But that is why you work with somebody like us and our team at FranCoach. We will help walk you through this. Just simply do the math. And we are not talking about algebra here. There are no letters mixed in. 


It is pure add, subtract, multiply, divide. This is not like when we were in school. If you want to grab your phone, use your calculator. It is all acceptable now, people. And at FranCoach, we are going to help you with that. We will help you figure out the cost of running the business. 


What are your fixed costs? Things like rent, your marketing. What is your cost of goods? What products are you selling? What is the cost of your labor? 


Do not forget marketing – sometimes people forget marketing. You are going to spend three, four, five grand a month at minimum on marketing. Guess what? Without that spend, how many customers will you have? In short, not very many. 


And then we can figure out the revenue. What is the average ticket? What is the average length of time a customer or client is with us? Whatever that particular business model centers around. 


For some, it might be a membership model – let’s say it is $100 per month for a membership. How many members do we need to pay the bills? How long do those members stay with us? 


Then, once we have paid the bills with the revenue, everything after that is yours. You do with it as you wish. 


Of course, we are always going to come back to our favorite little phrase with this: The money follows the fit. 


You are the one who has to get your butt out of bed every day and go run this business. If it is not in the sweet spot of what you are good at and what you want to do, you will never match the financial achievements of everybody else in that brand. 


Worry Less When You Work With FranCoach

One last time, we want to reassure you as we go through this. We have talked about the FDD before. It is cumbersome. It is overwhelming. It is... pretty unimportant in the grand scheme of things. But it does give us some basics on the financials to start with. 


But again, we want to use the information smartly, we want to connect with the franchise owners and ask intelligent questions. 


We are here to help you with that. We can help you ensure that you are not missing anything, that you are asking the right questions. And then again, is it the right fit on top of everything else? 


Exploring the world of franchise ownership on your own can be daunting – but you do not have to fly solo. Our team at FranCoach is dedicated to properly educating you about franchise ownership. We will help you determine IF it is the right path for you… and if so, we will guide you through the process of finding your perfect franchise match. 


Ready to get started? Schedule a call with us today.



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