How Do Franchise Owners Get Paid?

The financial future is bright for franchise owners. Even in the most competitive of markets, a franchise owner still has the ability to come out ahead in the form of profits received from sales and service transactions, as well as an optional yearly salary. 

According to a 2018 survey by Franchise Business Review, the average pre-tax income of franchise owners in the U.S. hovered around $80,000, with seven percent earned over $250,000 a year. 

Here are some important components that factor into how a franchise owner might get paid.

Profits From Sales and Service Transactions 

For a franchisee, revenue from sales and service transactions is the bread and butter of all profits. A franchisee profits from sales and service transactions. This is considered the “leftover” cash after all other overhead expenses are covered (i.e., equipment costs and fees; inventory and supplies; staffing, salaries and benefits; a brick-and-mortar location).

Yearly Salary 

The option to take a yearly salary varies on a case-by-case basis. So, depending on which franchise an individual partners with and how profits are trending, that person may choose to take a salary. A franchisee may also be able to take a draw from their accumulated equity. This is generally only an option for LLCs, S Corps, sole proprietorships and partnerships, according to ADP. It’s worth noting that owner draws affect working capital and have tax implications. Meeting with a financial advisor or tax attorney helps with peace of mind and is highly recommended for all franchise owners considering taking a salary. 

Fees To Consider 

Franchise owners buy into business models with proven strategies for financial and organizational success, and there can be substantial upfront fees. Of course, the largest fee is the initial buy-in, and from there, the franchisors collect a percentage of gross sales and a lump-sum yearly franchise fee. 

Investopedia gives the following example: “Dunkin' Donuts charges approximately $40,000 to $90,000 for the initial franchise fee, 5.9% in royalties, and 5% for advertising. The initial investment ranges between $109,700 to $1,637,700. A store that does $900,000 in annual sales would owe nearly $100,000 to the company. Adding in materials cost of about $200,000 would leave the franchisee with about $600,000.” 

There are, of course, expenses to consider that are deducted from this profit. These include rent, utilities, labor, taxes and more. Regardless, even after these are taken out of the owner’s hypothetical pockets, for a franchisee working in the expanse of a successful brand, he or she is likely to come out with a win at the end of the balance sheet.

The Outlook Is Bright 

A franchise owner bypasses the hard part of business development, branding and marketing and product research that independent business owners have to do themselves. There’s a strategy for profit given the above factors, and the numbers are trending positively for a profitable franchising industry. 

Related Stories: 

• What Should You Research Before Buying a Franchise?
• Why Buy A Franchise?