The most commonly asked question by potential franchisees is what kind of returns they can expect. How does one profit from a franchise? Maximising returns is a fundamental objective for all commercial ventures and having some understanding of the potential returns from a franchise business is key to making an informed decision on whether to invest your time and resources in the business. Some indicators of the potential success of a franchise include the following:

It starts with YOU

Most of the time, to profit from a franchise, it is not a franchise business that makes a franchisee profitable but rather the franchisees themselves who makes the franchise business profitable.

Many franchise models and business concepts will sound enticing on paper. You may learn about an exciting new franchise business and immediately begin to fantasise about the high returns. However in reality, your franchise will only be as successful as you allow it to be.

To profit from a franchise, you need to make sure that, when purchasing any type of franchise, you are inspired by the business concept, that you will be able to dedicate time and resources to see your franchise grow and that you have a long-term strategy towards returns.

Franchise Agreement

The franchise agreement and the disclosure document can be valuable sources of information for assessing the potential profitability of the franchise business. It is always advisable to seek both legal advice to fully understand your legal rights and obligations and accounting advice to assess the commercial viability of the business.

Some franchise agreements provide an income guarantee clause, which ensures a franchisee earns a minimum income over a determined period, often within the first year of trading.  You can often use the income guarantee clause as a good indicator of the types of returns they can expect to receive.   This is based on the concept that a franchisor will carefully consider the potential returns from a franchise business and set the income guarantee accordingly, so the income guarantee amount invariably reveals valuable inside information from the franchisor.

Disclosure Document

The purpose of the Disclosure Document is to give sufficient information to the franchisees so they can make an informed decision about whether to enter into your franchise agreement. This includes estimating all the expenses a franchisee will incur. The new Franchising Code of Conduct will additionally impose obligations on the franchisor to provide an information sheet detailing the advantages and disadvantages of franchising.

The franchisor is also required to disclose contact details for all existing franchisees, which are the best source of information for your prospective franchise business. The franchisor is required to disclose the contact details of all existing franchisees in the disclosure document. We highly recommend that you contact as many existing franchisees as possible and make enquiries as to how their business is fairing, what kind of profits they have earned and any problems or issues they have encountered.

Conclusion

The franchise agreement and the disclosure document can be the most valuable sources of information for determining potential profits from a franchise business. To ensure you are fully informed as to the content of both documents, we highly recommend you seek both legal and accounting advice. To profit from a franchise, a franchisee will need to both manage the business effectively and get appropriate advice as to the potential earnings that can be understood from the franchise agreement and the disclosure document.

For more information on how to profit from a franchise, contact LegalVision on 1300 544 755 and get a fixed-fee quote for advice today.

Next Steps

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