Is opening a franchise a good financial investment?

John Pratt writes:

It is simply not possible to refer to taking a franchise as an “investment”, whether good or bad. All that franchisors can do is to provide a tried-and-tested system and to confirm that if franchisees strictly follow the system that they will be profitable. The question is how profitable?

Whilst franchisors provide the system, of course, how well a franchisee’s business performs will depend on the extent to which a franchisee complies with the franchisor’s system, how good he or she is at business, and how much time and effort a franchisee is prepared to put in to their franchise business.

Generally, very few franchisees of established and well-known systems fail, although a tiny minority do – unlike the very high failure rate in non-franchised businesses. Starting your own business is inherently risky. Franchising substantially reduces that risk and that is as much as can be said.

As in the case with any business owner, the aim is to make a trading profit during the term of the franchise agreement and also to be able to sell the franchised business at a profit when the time comes for a franchisee to move on. Unprofitable businesses are hard to sell and obviously the more profitable it is the higher the payment that a franchisee would receive from a purchaser.

John Pratt is senior partner at specialist franchise firm Hamilton Pratt and has advised franchisors for over 25 years.