The most profitable Franchise
What are the most profitable franchise sectors ?
Every successful franchise project starts with a clear vision of the business of the brand you want to work for, but also of the sector you want to enter. Indeed, the success of franchises can vary greatly, depending on current trends, the economic situation and many other factors. Before you set your sights on a particular sector, it’s essential to understand its ability to generate high returns.
Starting a franchise is an important life choice.
This requires a greater or lesser investment, and choosing the most profitable franchise is often part of the selection criteria.
As a result, future franchisees are looking for a rapid return on investment with maximized profits. But how can they be sure they’re putting their money in the right basket? Which franchising sectors are the most profitable?
When it comes to choosing brands to engage in the mutual selection process, there are three elements to consider in terms of profitability: that inherent in the business sector, that of the franchise concept with a national vision, and that to be developed locally by the franchisee.
At the outset, of course, it’s important to understand how a company’s profitability is defined.
Sales, fixed or variable costs, gross operating profit… It’s important to understand the meaning of these terms, especially for newcomers, when comparing franchising sectors.
Generally expressed exclusive of tax, sales represent all revenues generated during an accounting period, i.e. sales of goods, manufactured products, services and ancillary activities to third parties (private individuals, professionals). It reflects the company’s normal, ongoing activity, and its size according to a commonly accepted model.
Fixed (or structural) costs are the regular expenses that have to be paid regardless of the company’s level of activity: amortization of the bank loan, rent for the premises, staff salaries, fees to various service providers (such as the chartered accountant), insurance, and so on.
Other operating expenses, variable (or operational) expenses are linked to the running of the company, and therefore to its volume of activity: supplies of goods, transport costs on sales, commission on sales…
In particular, fixed and variable costs are used to calculate the breakeven point, i.e. the minimum level of activity at which the company begins to earn money, and to determine margins.
However, the main indicator of a company’s performance remains the Gross Operating Profit (EBITDA) – calculated from several elements: added value in cash management, salaries and social charges, taxes, etc. – :
- It indicates the level of wealth generated by the company from the operating cycle;
- It provides a clear picture of the company’s economic profitability, before taking into account its investment and financing policy at the time of the annual balance sheet;
- It is also a factor considered by banks when applying for start-up financing;
- It is used as an indicator in the method used to evaluate the sale price of a company when it is sold.
Other elements are also useful in defining a company’s performance, including :
- Sales per employee,
- Outstanding accounts,
- Gross margin.
Good to know
Right from the initial contacts with banking institutions to apply for a business loan and prepare the business plan, the advice of a chartered accountant is highly recommended. The neutral, external viewpoint of this third-party expert enables him or her to challenge the franchisor in his or her area of expertise, without being in competition with him or her.
The value of the concept is more important than the overall profitability of a business sector.
In a particularly buoyant business sector, concepts may simply benefit from the windfall effect, or work very well in big cities and not so well in small and medium-sized towns (or vice versa, for that matter).
There are a number of factors that can be used to assess the quality of a concept, and therefore its profitability, both now and in the future:
- The increase in franchisee sales on a like-for-like basis (it must not be the additional number of newcomers to a network that causes the increase);
- Average unit sales compared with the industry average (2 to 3 times higher, in the best cases);
- The network’s steady expansion across the country, which benefits the brand’s reputation (in light, of course, of the closures observed in the Pre-contractual Information Document);
- The number of multi-franchisees (several points of sale within the same brand) and multi-franchisees (several points of sale within different brands, if the practice is authorized by the franchisor), which shows the interest of entrepreneurs in a concept;
- Brand awareness, know-how differentiation in the market and the franchisor’s talent for providing ongoing support;
- The brand’s regular innovations – tools, services, type of location, etc. – enable it to maintain its competitive edge;
- The actual profitability of the concept, based on franchisees’ actual income statements, and not on the projected operating accounts provided by the franchisor, even if they are sincere and reasonable (see previous chapter). It’s best to study sales outlets that have reached their cruising speed, i.e. at least after the close of their third financial year.
Good to know
The future franchisee remains the major force behind the profitability of his business, through his personal investment in his establishment, his skills (delegating tasks, overcoming doubts, anticipating the future) and his ability to take risks as an entrepreneur.
A sector’s profitability depends on a number of factors, including its future, its development and its sustainability.
You don’t necessarily have to look for the most profitable sector, as the success of a project depends on a number of other factors, not least the quality of the future entrepreneur and the concept.
However, it is important to look at the business sector from a number of different angles in order to assess its potential:
- Its future: A market growing by 7% a year, the personal services sector, for example, is experiencing a strong demand among the French population, as it is reputed to be the largest known source of employment and is driven by the ageing of the population (1 in 6 people aged over 65 by 2030). It benefits from a favorable regulatory and tax framework, but also offers low operating margins, offset by the volume of services provided.
- Its development: Real estate remains a cyclical market, dependent on the number of annual sales of existing properties, which has doubled over the past twenty years (now at an all-time high, with over 1.2 million transactions in 2021).With an average price increase of around 150% compared to 2000, with disparities depending on location.
After double-digit, almost insolent growth in recent years, the organic market has been in contraction since last year. But the food sector, including organic shops, still accounts for the largest contingent of franchisees (over 15,000), and represents 35% of franchise sales.
Durability: A true favorite of many would-be entrepreneurs, the foodservice sector (fast food, themed ;15% of franchised brands) oscillates, after the Covid confinements, between positive trends(85% increase in delivery growth between 2019 and 2021) and less encouraging ones (36% drop in out-of-home lunch visits in 2022, directly influenced by the increase in telecommuting).
However, this extremely competitive sector is incredibly inventive in terms of concept, and is constantly innovating to adapt to French consumer habits (home delivery via platforms, click & collect).
Good to know
While it’s essential for prospective franchisees to choose a product or service they’d like to sell, most brands offer real-life experience during an immersion course at one of the network’s outlets.
So, either he’s observing the company’s customers and back office, or he’s testing out the business in all areas (sales, management, etc.).
Be an innovative franchise
and exhibit on the 1st permanent virtual franchise expo !