Home | General | How to Make Money as a Franchisee

How to Make Money as a Franchisee

Leveraging people and assets across multiple operating businesses is what enables most companies to make money, including franchisees.    The leveraging action turns what would otherwise be an individual, high-overhead and high-risk investment into a portfolio of lower-overhead and risk-managed investments.

In a previous job I worked for a commercial real estate investment and management company.   The company made money because they were able to use the same employees to manage dozens of leased properties, and leveraging one employee across dozens of properties increased the profit margins.

In franchising, a multi-unit operator can leverage skilled managers across multiple units.  And, the $25,000 saved across 50 restaurants adds up quickly to a nice income.

A great example of leverage in franchising is Frank Heath and David Paradise of Mississippi-based Mid River Restaurants.   Between them they own:

  • 12 Applebee’s in Louisiana,
  • 26 Hardee’s in West Virginia, North Carolina and Kentucky,
  • 10 Taco Bell restaurants in Louisiana and Mississippi, and
  • 12 IHOP restaurants in Ohio, Indiana, and Kentucky.

And, they are in the process of acquiring 33 St. Louis area Applebee’s for the rock-bottom price of $25 million ($757k each, below build out cost).  The seller is DineEquity Inc., the parent company of Applebee’s Neighborhood Bar & Grill and IHOP restaurants.

Mid River Restaurants has several advantages over other small and individual franchisees:

  • profit per restaurant is higher than most because of their controllable costs are lower with centralized management, accounting and service teams
  • cash flow is large enough to finance large, well priced acquisitions
  • the greater cash flow also enables them to hire and retain smarter employees who are likely to further enhance the profitability
  • the whole enterprise learns from four very well developed franchise systems, exposing employees to “best of breed” methods

Individual franchisees as a group tend to be lower skilled, lower financed, micro-managers, unleveraged and over worked, which is why franchisors prefer experience multi-unit operators.

About Ryan Knoll

Attorney and advisor with an interest in franchising. Feel free to email me comments and questions on the "Contact Us" page.
6 comments
Liam Lawick
Liam Lawick

Ryan has really explained a very nice meaning of what actually franchise is. Mid River Restaurants has been a great example in explaining.

Ed
Ed

I recently met a gentlemen that runs a region for a major player in the airport restaurant industry. They cross-train all of their employees, staff and managers alike, to be able to work in any one of the restaurants at the airports they manage. He said that is very cost-effective to provide the training and have a huge staff available to them for any one of the restaurants. And, as we all know, that industry is notorious for people calling in "sick" on short notice or not showing up at all. I think a lot of it has to do with how big a franchisee sees their business being. Do they see their stores as a chain of "mon-and-pop's" or as a larger overall business? http://theemployersedge.com/business-training-coaching/a-view-of-the-business

R Stevens
R Stevens

True Ryan but Mid River Restaurants unfortunately are not the rule. Many multi unit and multi concept organization have trouble with the transition to multiple focuses. The concept that has the squeaky wheel or has urgent issues ends up with the most resources, leaving the others to quietly grow their own urgent issues. That is until the issue becomes the new focus. I congratulate Mid River Restaurants for having the people and foresight to make it work. R. Stevens

Andy
Andy

TJ I don't think Ryan is trying to say that you need to have multiple franchise units in order to be successful. However, it all depends on the franchisees' goals. I know that I work with a fitness franchise and you can certainly make a fine living owning one of our gym franchises, but you are not going to become a millionaire doing so. So the question is wheat sort of life and business do you want to own TJ?

David
David

The most important phrase you used in your blog was 'cash flow' Ryan. Being in the franchise world it makes sense for franchisors to lower their initial investments to multi-franchise unit franchisees with 'deep pockets' because ultimately these types of franchisees will increase the franchisor's revenue through royalites and secondly it will push the franchisor's 'brand' because franchisees with 'deep pockets' have the best opportunity for sustained success. Good post Ryan.

TJ
TJ

Is your conclusion that owning just 1 franchise is going to be unsuccessful? You need multiunits to get good returns?