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Restaurant Franchisee's Guide to Assessing True Earnings and Profit

Navigate franchise earnings wisely: Learn how to discern franchisor claims and realistically assess potential profits in our definitive guide for restaurant franchisees.

3 mins readJanuary 15, 2024

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Restaurant Franchisee's Guide to Assessing True Earnings and Profit

Embarking on a restaurant franchise venture? Caution is key. Franchisees often face overstated earnings claims by franchisors. It's crucial not to take these projections at face value. Our guide empowers you to critically evaluate these representations.

Learn to effectively probe and question franchisors, ensuring you gain a clear, realistic picture of potential profits. This is not just about understanding the numbers; it's about making informed decisions to secure your financial future in the franchise world.

Understanding Common Financial Representations

Franchisors often present a range of financial representations to attract potential franchisees. These include:


TermWhat this isWhat the franchisee should know
Average RevenueThis figure represents the mean income generated by franchise units.It's crucial to understand whether this is an average of all units or only the top-performing ones.
Gross ProfitThe revenue minus the cost of goods sold (COGS).It's a useful indicator but doesn't account for other operating expenses.
Net ProfitWhat remains after all expenses are deducted from the gross profit.This is the most telling figure for potential earnings.
Return on Investment (ROI)A measure of profitability that calculates the return on the initial investment.How this measures the profitability against the initial investment.

These representations can vary widely, often presented as averages, ranges, or best-case scenarios. It's essential for potential franchisees to critically evaluate these figures, considering their specific circumstances such as location, target market, and operating costs.

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How much does it cost to run your new restaurant? How will you manage labor costs, food costs and other expenses? Ditch the calculator and read these tips before you start calculating figures.

Verifying Financial Representations Made By the Franchisor

To verify the financial representations made by franchisors, compare the franchisor's claims with industry averages and benchmarks. This can provide a reality check against overly optimistic projections. To effectively compare the franchisor's claims with industry averages and benchmarks, a franchisee should undertake a series of concrete steps:


  1. Get the Franchisor's Numbers: Ask the franchisor for their financial information like how much money their franchises usually make and spend. Make sure these numbers are recent and for businesses similar to the one you're considering.

  1. Look Up Industry Averages: Find reports online from places like IBISWorld or government sites that tell you about average earnings and costs for similar restaurants. This helps you know what's normal for the industry.

  1. Compare the Two Sets of Numbers: Look at the franchisor's numbers and the industry averages side by side. If the franchisor's numbers are a lot higher than the average, ask why. Think about how things like location or the type of customers could make a difference.

  1. Talk to People Who Know the Industry: Chat with experienced restaurant owners or people who work in the industry. They can offer real-world insights and might be able to tell if the franchisor's numbers seem realistic.

By following these steps, you can check if the franchisor's financial claims are reasonable compared to what's typical in the restaurant industry.

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Additional Considerations for Evaluating Potential Earnings

Other factors that can significantly impact potential earnings include:


1. Location


The success of a restaurant franchise heavily depends on its location. Evaluate the foot traffic, local demand, and demographic compatibility:


StepActionsPurpose
Analyze Foot Traffic DataUse tools like Placer.ai or AlphaMap to track and analyze foot traffic.
Assess foot traffic volume, dwell time, peak times, and visitor patterns.
To gain insights into visitor behavior and profiles at specific locations.
Evaluate Local Market DemandIdentify tools for cross-visitation data to understand customer behavior.
Collect data over a long period to observe trends and ensure reliability.
To understand the shopping habits and preferences of potential customers in the area.
Determine Demographic CompatibilityUse the Experian Segmentation Portal for demographic data.
Compare your target market with the local community demographics.
To ensure your target market matches the local community and demographic.
Access and Test Quality of DataAccess foot traffic data through GIS tools for detailed statistics.
Ensure data accuracy by considering sample size and comparing with other sources.
To confirm the reliability and representativeness of the foot traffic data.

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2. Franchise Support


Consider the level of training, marketing, and operational support provided by the franchisor. These can be crucial for success.

Here's a breakdown of the typical types of marketing support you can expect, their benefits, and the average costs:


Type of Marketing SupportDescriptionBenefitsAverage Cost
National Advertising CampaignsLarge-scale marketing efforts including TV commercials, online advertising, and print media.Increases brand awareness and attracts customers by leveraging the brand's national presence.Covered by a national advertising fee, usually 1-4% of gross sales.
Local Store Marketing (LSM)Tailored marketing focused on the community around your restaurant, like local sponsorships and events.Builds local brand presence and community engagement, driving customers to your restaurant.Varies widely; franchisors may provide a budget or guidelines.
Digital MarketingSocial media campaigns, email marketing, and online ads targeted at your restaurant's area.Enhances online presence and targets a digitally savvy customer base.Ranges from a few hundred to several thousand dollars per month.
Promotional Materials and MerchandisingFranchisor-provided materials like posters, flyers, and branded merchandise for in-store promotions.Aids in-store promotions and maintains brand consistency.Often included in the marketing fee or provided at a subsidized cost.
Training in Marketing and Brand ManagementTraining provided by franchisors on effective marketing and local brand management.Empowers franchisees with skills for effective marketing strategies.Usually included in the initial franchise fee or ongoing training fees.
Seasonal and New Product CampaignsSupport for marketing new products or seasonal specials.Keeps the menu fresh and exciting, encouraging repeat visits.Part of the national advertising fee or additional, depending on the campaign.
Website and Online PresenceCreation and maintenance of a webpage within the franchisor’s site, and support for digital presence.Ensures online visibility and a professional web presence.Often included in the marketing or technology fees.

Takeaways

Here are 10 actionable takeaways for franchisees to evaluate their potential earnings from buying a restaurant franchise:


  1. Understand Financial Terms: Know what 'Average Revenue', 'Gross Profit', 'Net Profit', and 'Return on Investment (ROI)' mean and how they relate to your potential earnings.

  1. Check Revenue Averages: Determine if the franchisor's average revenue figures represent all units or just top performers.

  1. Gross Profit Analysis: Understand that gross profit (revenue minus COGS) doesn't include other operating expenses.

  1. Focus on Net Profit: Pay special attention to net profit, as it shows earnings after all expenses.

  1. Evaluate ROI: Consider how the ROI measures profitability against your initial investment.

  1. Verify Financial Claims: Compare franchisor's financial claims with industry averages and benchmarks using resources like IBISWorld or government sites.

  1. Seek Industry Insights: Talk to experienced restaurant owners or industry experts for real-world insights and validation of franchisor's numbers.

  1. Location Evaluation: Assess the franchise location for foot traffic, local demand, and demographic compatibility using tools like Placer.ai or AlphaMap.

  1. Analyze Marketing Support: Consider the types of marketing support offered by the franchisor, including national advertising, local store marketing, and digital efforts.

  1. Training and Operational Support: Evaluate the level of training, operational, and marketing support provided by the franchisor, as these are crucial for success.

By following these steps, prospective franchisees can make a more informed decision about their potential earnings and the viability of a restaurant franchise investment.

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