The majority of franchise owners are first-time business owners. While many of these have managed other businesses and developed the necessary skills to leap out on their own, it is still an adjustment to go from an employee to being a franchise owner. Most prospective franchise owners have been able to count on one thing– a paycheck to cover their living expenses each month. So, what happens when you open your franchise, and you don’t have a paycheck that ends up directly deposited into your bank account every other week? Unfortunately, this style of pay can keep people from diving into franchise ownership. But being able to separate the idea that you need a job versus needing an income will make the difference in your willingness to invest in yourself and start your own business. If you desire the freedom and independence that comes with being a business owner, franchising might be the best option for you. It allows you to achieve success using a business structure that has worked for many.
Salary Comes From Profit
Keeping it simple: as a franchise owner, you do not get a salary if you aren’t profiting enough. Franchise owners aren’t just responsible for operating their business; they have to grow it. When you first open your storefront, profits can be slim. Just paying the bills can exceed your overall revenue most days. The success of the business is what pays franchisees – and franchisors too. But you can bet that the franchisors will get paid their portion first before profits are distributed to franchisees.
All businesses, regardless of their structure, have expenses. These include utilities, rent, equipment, and inventory. Franchises come with additional expenses as there are ongoing fees to operate the brand. Whatever cash flow remains once everyone else is paid will be given to franchisees as income.
Providing Income Through Deficit Spending
When your application to open a franchise is approved, you are required to have a certain level of cash reserves. There are different reasons for such reserves. For many, they are used to cover their own living expenses so that they can direct their attention on establishing and growing the business without worrying how they are going to be able to put food on the table.
Cash reserves are also needed to help the business grow until the business starts to make a profit. Franchises rely on cash reserves when needed, however the more of these funds you use, the longer it will take for the franchise to start paying for itself. While it might be necessary to continue using the reserves, the sooner your business is profitable, you will have money to spend in other ways.
When you own a business, your goal is to be profitable. More is better. But how franchises use profits can vary based on your own personal goals. If you are planning to grow the franchise and sell it later, you should consider reinvesting into the infrastructure, growth, and equipment using marketing and sales. By doing so, you are able to increase the value of your franchise so you can sell it for a bigger profit.
But there are franchise owners who choose to buy a franchise, or several, as a way of life. Their plan is to eliminate a boss or be a semi-absentee owner who is able to vacation during the off-seasons or skim profits when they become established, so they no longer have to work as hard. If this is your goal, you should use the profits for yourself and pay yourself along the way.
Regardless of your plan and what you hope to achieve, your franchise will only be successful through the profitable operation of a proven brand. Franchisors are aware of the different reasons their franchisees invest in the business, and they want you to be successful. Your success is theirs. The franchisor will get paid first through their continuous fees, but success through profit is the ultimate goal that everyone is working towards.
With the support of your franchisor, recognizable branding, and dedication, you will see profits and then you will be able to pay yourself.
Aaron Bakken can help you achieve success as a franchisee. Not sure where to start?
Contact Aaron (608-576-4592) for a Free Consultation!
About Aaron Bakken
Franchise Consultant for The Franchise Consulting Company
Aaron has 20+ years of franchise and independent business ownership experience. He also spent 5 years as the VP of Franchise Development for an international franchise group, growing the franchise to the advent of a private equity buyout. Whether you are looking to buy a franchise opportunity or franchise your business, Aaron knows how to guide you.
No Cost To You
Aaron is paid by franchisors and development companies for bringing them viable franchise investors. So frankly, his clients have nothing to lose by engaging with him but a bit of their time. Aaron helps his clients navigate the complex world of franchise ownership and development and provides long term guidance to help his clients achieve their entrepreneurship goals.