You can make a good, even a great, living as a franchisee. And you can arrive at a reasonable income estimate well before you decide to invest in a franchise. The keys are to:

  • Take advantage of the due-diligence process to dig into the numbers with the franchisor and franchisees
  • Take into consideration your entire income “trifecta” for a real sense of ROI
  • Evaluate your cultural fit with the organization since it will have an impact on your financial performance, according to studies.

More Reliable Franchisee Income Estimate

True, this isn’t as quick as a google search — which finds that most franchisees earn between $50,000 and $200,000 a year — but your estimate will be more precise and pertinent to your situation.

And by the way, yes, you read that last point right. Studies show there is a link between your fit with a franchisor and how much you make. There’s even a free online science-based assessment tool that identifies the best franchise types for you based on your values, workstyle and other key factors.

But that’s getting ahead of ourselves. Let’s go through the three steps above in order. Keep in mind that we are available to guide you through this process, at no fee to you.

Start With an FDD’s Item 19

Start by reviewing a copy of the Franchise Disclosure Document (FDD) for the brand(s) you are considering. Franchisors provide it as part of their discovery process, explained below.

Like a stock prospectus, the FDD discloses extensive information about the brand, enabling you to weigh your risks and benefits before investing.

An FDD consists of 23 sections or “items” – and Item 19 is where the brand discloses data about its financial performance. The data, which can inform your income calculations, may include:

  • Average revenue, gross profit and operating profit for franchisee- and brand-owned locations
  • Itemization of key expenses, including franchise fees and royalties, and their percent of revenue
  • Average revenue per customer order
  • Average revenue for a franchisee’s first and subsequent years

Oftentimes, a franchisor will tier franchisees by financial data, which allows you to see the differences across top-, mid- and bottom-level performers.

The FDD As Part of Your Discovery Process

Reviewing the FDD, especially Item 19, is a key but not the only step in your interaction with the brand. Typically, if you are a serious investor, you will speak with a representative on the development team and go through a discovery process.

The multi-week journey starts with a presentation overviewing the business model. This is followed by sessions that take you deeper into the brand’s marketing, operational and support systems, and more.

A highlight of the process are the frank fact-finding conversations you are invited to have with franchisees during what are known as “validation calls.” (We recommend you talk with at least 10 owners and former owners.)

What about the FDD, you ask? Well, early on there’s a session focused on the document and the financials disclosed in Item 19. You will be provided a copy, along with a blank templated spreadsheet for your personal use. This is when your number-crunching begins.

Estimating How Much Profit Your Franchise May Make

Using the FDD ad the spreadsheet provided by the franchisor, here’s what to plan for:

  • First Pass — Using Item 19 data and notes from your conversations with the brand, you will fill in your spreadsheet with preliminary financial assumptions and income projections.
  • Validation Calls — During calls with franchisees, you will be able to share your spreadsheet, get their feedback, fine-tune your numbers and view your refreshed scenarios with greater certainty.
  • CPA Review — You will want to run the spreadsheet past trusted advisors; make sure your mix includes an attorney and CPA, both with franchising expertise (we can suggest several).

No Guarantees But High Confidence Level

A franchisor’s discovery process is remarkably transparent, allowing you to arrive at earnings estimates with a good degree of confidence. Most assuring is the unvarnished input from franchisee owners who have already traveled your path.

There are no guarantees you can replicate another franchisee’s performance, but if a franchisor’s Item 19 is solid and the system’s franchisees validate your financial assumptions, those are encouraging signs.

Five Discovery Process Caveats

As helpful as a brand’s discovery process is in helping you estimate how much you can make, there are caveats:

  • Not every brand discloses financial data in its Item 19 — about two-thirds do. Some brands are too new, others choose not to disclose or don’t have access to their franchisees’ data. Still, you may be able to get numbers directly from franchisees.
  • The financials disclosed by brands in Item 19 vary greatly — some provide incredibly thorough information, such as profit and loss statements for every or most locations; others offer only snippets. Here again, conversations with franchisees can fill in gaps.
  • Stay away from “off the record” data disclosures — a brand’s representative is restricted by law to discussing only the data published in Item 19; anything more would cross legal and ethical lines. This does not apply to franchisees; they can disclose as much as they’d like.
  • Franchisees may hesitate to speak with you — unless you’ve been referred by a brand rep. Otherwise they may think you are a competitor fishing for intelligence. Franchisors will instruct you during their discovery process how to validate with their franchisees.
  • Give yourself financial wiggle room — even if you’re highly confident about your numbers, consider less rosy scenarios: What if you cut revenue expectations by 10-20%? What if breakeven is delayed six to 12 months? Can you still be satisfied and able to survive financially?

Beyond Franchise Income, a Financial “Trifecta” Beckons

Your analysis should not focus solely on potential income – as in a straight salary swap. As your CPA will note, owning a franchise can yield two other strong financial benefits:

  • Access to tax write-offs that can improve your cash flow by hundreds and thousands of dollars annually.
  • Selling your business for a handsome profit. For a point of reference, a rule of thumb is that a franchise can sell for four to five times EBITDA (earnings before interest, taxes, depreciation and amortization).

So, when asking “How much can I make” be sure to consider your entire financial “trifecta” (income, tax benefits and exit selling price).

Your Brand Fit Can Affect Your Financials

A final word of advice: Even if the investment opportunity looks financially promising, there’s one other consequential factor, your fit with the brand.

Studies show that a franchisee who is compatible with the brand is more likely to be a strong performer. By compatibility, we mean alignment with the brand’s values, culture and stage of growth – as well as the personal work style and skills that best predict success within the organization.

Often overlooked or underestimated, it’s all about fit. You could be an ideal owner, but with the wrong brand – which means you could suffer financially even if the brand is exceptional.

The discovery process is your chance to experience a brand’s culture and values. Does it seem like an organization in which you fit and can succeed? Do you “connect” with senior executives, franchisees and others you’ve encountered? Will you feel comfortable as part of this tribe?

Free Online Tool Suggests Your Best Franchise Fit

Behavioral scientist Rebecca Monet has done extensive research on franchisor-franchisee compatibility. She has translated her work into an assessment tool that measures your values, workstyle, personality traits and professional skills and strengths – and then pairs you with the types of franchises that fit you best.

In effect, the instrument short-circuits your search for best-fit franchisors.

We offer a free opportunity to take the 10-minute assessment online, with a 1:1 review afterwards. If you’re interested in this scientific approach to optimizing your odds for financial success, take the assessment here.

Summary: Don’t Let Numbers Be Your Only Guide

In franchising, when it comes to figuring out how much you can make, arriving at the answer can be straightforward, but the process requires effort and introspection.

Yes, an FDD’s Item 19 is a good starting point. Yes, a franchisor’s discovery and validation process is a remarkably transparent way to get at numbers that are pertinent to you. And yes, there are potentially powerful financial benefits beyond an income stream that you should take into account.

But even if you land in a promising place with your financials, know yourself. Will you fit in? Will you put in the necessary work to succeed, including following the franchisor’s playbook?

Be certain of your answers to these questions; don’t let the numbers be your only guide.

Want Help Evaluating Franchise Opportunities?

We can help you identify and invest in the franchise business that is right for you. Our personalized ownership recommendations help you save time, reduce risk and invest confidently – with no fee or hidden costs.

Our process starts with a free 15-minute conversation during which we introduce ourselves, learn about you and give you a sense of how we’d work together. You can then decide if you’d like to proceed.

No obligation, no catch – we invite you to chat when you’re ready. You can schedule easily online for the date and time of your preference.