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Entrepreneur takes great pride in its Franchise 500 rankings. We’ve ranked the best franchises in the U.S. for more than 40 years, focusing on five primary categories: costs and fees, support, size and growth, brand strength and financial strength and stability. You can read here how Dunkin’ took home top honors in 2020 and check out our top 20 franchises, but that doesn’t mean investing in a Dunkin’ — or any of the other top franchises — is the most profitable choice for you.
In fact, it’s nearly impossible for any ranking system to guarantee a return on your investment. There are simply too many variables to take into account for each individual case. However, you can better position yourself by doing research ahead of time and defining your goals and limitations before diving in financially. Although this is not a holistic list, answering these five questions can help give you a better sense of which types of franchises will be most profitable for you.
1. How much can I afford to spend on my franchise’s initial investment?
Last year, Bankrate reported that the average American has $8,863 tucked away in savings at a bank or credit union. It’s simply not practical for most people to invest in our top hotel franchise, a Hampton by Hilton, which costs more than $7 million — at minimum. And although you might be able to buy a burger for a buck at a fast-food stop, the startup cost for a McDonald’s franchise will run you seven figures.
The first step in finding the most profitable business for you is deciding which franchise opportunities you can actually buy.
If your budget is limited, some franchisors offer multiple investment options. For example, the No. 34 franchise on our list, Jan-Pro Franchising Int’l. Inc., features unit franchises and executive or master franchises. Unit franchisees typically deal directly with the consumer, while executive franchisees organize and oversee a local group of unit franchisees. Unit franchisees require less experience and initial investment, but it’s possible that an executive franchisee might make more over the long run.
2. How profitable have other franchisees been in similar circumstances?
Want to get a clearer sense of whether an executive franchisee or unit franchisee is more profitable in your area? Want to know whether a commercial cleaning franchise like Jan-Pro even makes sense for you, or whether a home-based travel agent network like Cruise Planners makes more sense? Go directly to the source.
Local franchisees can fill in many of the gaps that online resources like our Franchise 500 simply can’t. They know better than anyone the challenges and opportunities someone else might have by starting a similar franchise would face.
In every walk of business, experience and mentorship are incredibly valuable assets. In fact, the strategy of franchising taps into these assets more than other businesses by allowing new business owners to rely upon the history, brand reputation and resources of an established company’s business model.
If you’re serious about investing in a franchise, you should take the time to talk to others who can teach you about the business and answer questions you might not even know to ask.
3. How much can I expect my franchise to earn in sales?
If you think other franchisees will answer, this could be a great question to ask them. If you want to invest in a fast-food franchise, you can check QSR’s ranking of the top 50 quick-service restaurants by gross sales. In general, however, finding specific sales or profitability numbers can be difficult. There’s no profit margin without sales or income, so getting a sense of these things will be essential to understanding your franchise’s potential profitability.
4. How much money will I have to give back to my franchisor in royalty fees?
In addition to an initial franchise fee and startup costs, you will likely be required to pay two other fees. The first of these is a marketing fee, which the SBA explains as such: “When you own a franchise, one of the things you’re hoping to capitalize on is the brand. Franchisors spend thousands of dollars every year to advertise their brand. As a franchisee, you’ll be asked to do your part, too, by way of a monthly marketing fee. Franchise marketing fees are usually based on your monthly revenue.”
The second fee is a royalty fee. “Franchise royalties are usually collected by your franchisor on a monthly basis,” explains the same SBA post. “Like marketing fees, these fees are based on a percentage of your revenue.”
However, this isn’t always the case. For example, Anytime Fitness requires a marketing fee of $449 to $699 per month and an ad royalty fee of $300 to $600 per month. Entrepreneur can help you determine the marketing and royalty fees for the businesses in the Franchise 500, which are broken down on the respective franchise pages.
Try to calculate other costs that come along with investing in a franchise. How many employees will you need to hire? Can you run the franchise from home, or will you need to pay for a physical space? Some of these questions you might be able to answer on your own, and some you might be able to learn from other franchisees or the franchisor.
5. How much time do I plan to invest in the franchise?
Investing in a franchise doesn’t mean you own it forever. Typically, you must agree to a term of agreement, which “spells out the length of time that your franchise agreement is valid — usually anywhere from five to 20 years.”
If you remain in good standing, you will most likely be able to renew your agreement for a percentage of the then-current franchise fee. However, when calculating the most profitable franchises for you, it’s important to consider how much you can expect to earn over the course of that term of agreement. Do you plan to invest in a franchise for five years? 10? 20?
Do you even have time to make a franchise your full-time focus, or would you prefer an option that you can use as a side hustle?
The most profitable franchises for you might not be the best for someone else.
If any franchise could really be profitable all of the time — if there were such a thing as “the most profitable franchise” — then investing would be easy. But, when considering how much money you could make on a certain venture, it’s essential to take into account dozens of factors.
Answering questions about sales and startup costs, royalty fees and time investments can help give you a clearer sense of what will work for you and what won’t. Similarly, using a variety of trusted sources will help fill in the blanks and point you in the right direction. At the end of the day, becoming a franchisee is a big investment, and as investor Warren Buffett once said, “never invest in a business you cannot understand.”
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5 Ways to Find the Most Profitable Franchises for You
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