How long does it take to make money from a franchise?

Investing in a new franchise opportunity can be an exciting way to run your own business, but one of the most common questions potential franchisees ask is: how long will it take before the business starts making money?

The answer depends on many factors, including the type of franchise, initial costs and the experience of the franchisee. We asked leading franchise experts to share their insights on expected profits, recouping investments and getting a franchise up and running…

Can I earn an income from day one?

Brian Duckett, former chairman of The Franchising Centre, emphasises the importance of understanding the difference between profit and cash flow. “One way or another, you’ll need income from somewhere in order to pay your living expenses while everything gets going,” he says.

“Living expenses vary greatly from franchisee to franchisee. Some may have three teenagers at private school and a big mortgage to service. Others may be individuals who simply need a roof over their head and something to eat.”

He adds that the franchise model you choose also affects early profitability. “Depending on the franchise model being operated, the latter case [with fewer personal expenses] is more likely to be able to produce sufficient profits, almost from day one.

“In my case, when I was a mobile service franchisee who was paid by clients on the day, it was just about possible.”

Duckett stresses the need for a tailored business and funding plan. “Every franchisee is a unique business set up that has its particular funding requirements. This is why every franchisee needs to have their unique business and funding plan prepared with the help of professionals who know the franchise in question and how it operates.”

How long after signing the franchise agreement will I be trading?

Louise Harris, principal at Franchise Projects, explains that the timeline depends on the sector and the preparatory work needed. “It would be unusual to sign a franchise agreement the same day as launching a franchise business, but it will depend on the need for acquisition prior to operations, eg a vehicle, property, equipment and licences, etc,” she says.

Property-based franchises, she notes, usually require post-signing work. “A lot of the groundwork in identifying locations may have been done before signing the agreement, but agreeing a lease or purchasing a building for use while trading as a franchisee would require some security. The landlord may expect to see your franchise agreement.”

John Pratt, senior partner at Hamilton Pratt, adds that most UK franchise agreements specify a timeframe for opening: “[This is] normally three to six months after signing the franchise agreement.”

When can I expect to make a profit?

The general trend for five-year franchise agreements is that profits grow gradually over time. John Pratt explains, “Historically, franchise owners have made a substantial loss in the first year, a much smaller loss or break even in the second year, make a small profit in the third year, and make larger profits in the fourth and fifth year.”

Brian Duckett highlights the variability depending on the franchise type and overheads: “Many franchisees make an operating profit from their first week, ie the value of sales they make exceeds the costs of making those sales, including operational overheads such as petrol or vehicle hire.

“On the other hand, some franchisees don’t make an operating profit for many months as their sales take a while to build up after the start-up period or they have considerable overheads to cover such as rent, rates, equipment leases and staff.”

How long will it take to recoup my investment?

According to Duckett, this is usually measured in years rather than months, but “should ideally be about halfway through the initial term of the franchise agreement.”

Vicky Wilkes, head of legal at Aston Villa Football Club, explains the role of the franchise fee in investment recovery: “As a rough guide, the initial fee should be no more than ten per cent of the total cash requirements of the franchisee in starting up the franchise.

“If the fee looks excessive, always ask for a breakdown to satisfy [yourself] that the franchisor’s profit element is not too excessive. Always ensure that the term of the franchise agreement is long enough to recoup the initial payment and turn a profit.”

Brian Duckett also notes the importance of cash flow: “Remember too that it’s not just when the investment will be recouped that’s important. You will also need a cash flow forecast to make sure you have sufficient working capital available to ensure the business can continue trading until that happy day comes along.”

What factors influence how quickly a franchise becomes profitable?

Several key factors affect profitability:

● Type of franchise: Low-cost or mobile franchises may become profitable quickly, whereas premises-based or high-investment franchises take longer.

● Franchisee experience and skill: Effective management can accelerate growth.

● Customer base growth and sales: Anticipated demand and marketing impact the speed of income generation.

● Operational costs: Rent, staffing and equipment leases can extend the break-even point.

As Brian Duckett says, “Every franchise is different. The franchisor should supply you with a template business plan and some advice on what typical costs are likely to be at various levels of turnover.”

Summary

While every franchise is unique, experts agree on some key points: profits are unlikely in the first year, cash flow planning is essential and the initial investment should be recoverable within the term of the agreement.

Most franchise agreements require opening within three to six months. With careful planning, you can expect to achieve growing profitability over the five-year term.

Franchising can be a rewarding route to business ownership – but understanding the financial realities and planning carefully is crucial to turning your investment into a sustainable, profitable business.