Where Franchisees’ Salaries Come From
Most franchise owners don’t receive a salary. Instead, your earnings as an owner come from the excess revenue after overhead costs to support the operation of the business are paid. To name a few, those costs typically include equipment and fees, inventory, supplies, staffing, benefits, utilities, rent, taxes, royalty fees, and advertising fees.
As advised typically by a CPA or financial advisor, business setup can help you determine if taking a salary is right for you. ADP, a payroll company, says it’s generally only an option for partnerships, sole proprietorships, LLCs, and S Corps. It’s highly recommended that all franchise owners meet with a financial advisor or tax attorney if they consider taking a salary.
Factors Influencing a Franchise Owner’s Earnings
Besides the overhead costs mentioned, other elements that can influence the answer to how do franchise owners get paid include your expertise, stock control, and workforce. So, suppose you already have expertise in business ownership or the industry you’re investing in. Then you’ll have less of a learning curve as a new business owner. If you’re new to business ownership, don’t let that scare you. Investing in a franchise provides you with a proven business model to follow. For example, American Family Care has successful owners from all walks of life because our system is well-supported by the franchisor. Our operational system has been in place for more than 40 years, which helps franchisees find success no matter their background.
Lastly, your workforce can influence your earnings. Hiring qualified people, even when you have to pay a little more, can increase your bottom line. They keep customers returning and help drive your revenue.
How is Franchise Revenue Calculated?
A franchisor cannot legally provide an exact amount a franchisee will earn. Still, many will show you a representation of what current owners make. It’s listed in Item 19 of the franchise disclosure document (FDD). Remember, when looking at average income data, it includes both single- and multi-unit owners and locations that have been open for many years. Therefore, median income data is more useful because top performers can dramatically inflate an average.
Franchise Gator has developed a franchise income equation to help estimate your earning potential with a franchise:
- Find the total amount of royalty fees paid to the franchisor by existing franchisees during the previous year.
- Take note of the royalty fee rate, which is usually a percentage of a franchisee’s gross sales.
- Take the total number of franchises operating full-time and divide it by the royalty fee total to get the average royalty payment.
- Then divide that average royalty payment by the royalty fee rate. The answer will give you an average gross sales dollar amount.
The average gross sales amount is different from the mean profit. But you’ll still have to take operating costs out of that amount. So, you can then estimate your expenses by studying the FDD. Then, subtract that amount from the average gross sales.
It’s important to remember that Item 19 of the FDD is earnings as reported by franchisees for the previous fiscal year. It should not be used to predict or guarantee any earnings and is a tool to better understand a brand’s past financial picture. Keep in mind that this section is also optional according to the FTC and may not always be present in every franchisor’s FDD.
Who Pays Franchise Employees?
According to ADP, franchise owners typically pay their own employees. Sometimes, franchisors will provide owners with a third-party payroll service; in some rare cases, the franchisor will handle employees’ payrolls. The FDD will determine who pays franchise employees and whether a payroll service is offered. Owners must abide by the laws and regulations of state and federal governments.
A Good Franchise ROI
Entrepreneur notes that a 15% return on investment (ROI) is very good for franchisees. Experts advise that you only analyze franchise businesses in at least their third year of operation because it typically takes a location a couple of years to mature.
When studying franchise ROIs, consider the time and effort that you’ll invest into your location. Do this by assigning a value to your time. Most people use $60,000 for their time per year. So, at the very least, try to find a brand that can provide that ROI.
You’ll also want to consider the lifestyle changes that come with becoming a business owner. Many people decide to leave corporate America and invest in a franchise to escape the rat race and take control of their time. If you can now enjoy more time with your kids or coach a soccer team, consider that in your ROI analysis.
Investing with AFC
When researching money-making franchises, one of the questions you should ask is, “How do franchise owners get paid?” Consider what the brand tells you and all the factors that could affect the amount that comes into your pocket. At AFC, our initial investment is estimated to cost between $1 million – $1.5 million, but the potential for a hefty ROI is there. We provide our franchise owners with world-class training and comprehensive ongoing support. In addition, you can capitalize on the growing urgent care industry by offering multiple services. Increasing your potential revenue streams will only increase your ROI.
Ready to learn more about the opportunity with AFC? Apply now.