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What Industries Produce the Highest Profit Margins for Franchises and Why That's Important to Know

What major franchising industries produce the greatest net profits for their stores? For example, are profits for an owner-operator typically better in a frozen yogurt shop or is a fast food restaurant that serves meals all day better? Are the falling profit margins better in a typical fitness center or janitorial service? And where are net profits more strongly trending up? In a hotel or real estate office?

Thanks to data from Sageworks, a financial information company (www.sageworks.com), and Forbes contributor Mary Ellen Biery, there are comparisons of net profit margins by major franchising sectors (see table below).

There is a caveat. Biery quotes Sageworks analyst Libby Bierman, who stresses:  

"Some industries —like gas stations and new car dealers -- rely on volume for growth, so you can't say that in all cases, a higher profit margin is required in order to be successful," she said. "However, stronger profitability certainly makes it easier to turn sales into income for the owner." — Forbes

Offices of real estate agents and brokers — Re/Max, Keller Williams and Century 21 are examples of franchised real estate offices. They have the highest net profits. Better yet, those profits have been growing. Here, a caveat is warranted as well: a past record is not a guarantee of future performance.

In what industries can franchisees expect the lowest net profit margins for their efforts? Sageworks’ list shows that snack and nonalcoholic beverage outlets like frozen yogurt stores, donut shops and juice bars earn the lowest net profit margins of the major franchising industries.

Buyer or investor?

Knowing what industry has higher profit margins is helpful to understand the big picture of where it is easier to retain earnings in a franchise.

I've had people come up to me, a journalist who reports on the franchise world, to ask: “What do you think of Jazzercise Fitness Centers?” Or, they have queried: “I’m thinking of buying a Jamba Juice franchise. What do you think of them?”

Their questions revealed a confirmation bias from the get-go in their decision making. In essence, the buyer has already fallen in love with a single franchise concept and hopes others will confirm how beautiful their future business is, or they might feel that they haven't done enough due diligence unless they can check the box of having someone rain on their parade.

Looking at other industries and knowing their profit trends can help pull the investor away from the one-horse trap of just looking at one business concept in one industry.

Another typical cognitive error is where a prospective franchisee wears a consumer hat instead of a business hat. Franchise sellers often label franchise investors as if they were consumers. The literature even calls these prospective franchise owners “franchise buyers” as if these investors of franchised businesses are buying a blouse or car. Someone who acts like a buyer looks at a particular franchise because they’ve enjoyed working out at a fitness center or enjoyed a chain’s juices. 

"What made you decide on a Jazzercise franchise?" I would ask of my inquirer. 

"I loved their workouts and thought they would really catch on," came a typical answer.

Understanding how the consumer will react to a concept is indeed important. But there are two ways to see the same thing. One through a consumer's eyes and one through a capitalist's eyes.

Shake multimixer salesman Ray Kroc had seen the businesses and argued the profits of many drive-in restaurants and soda fountain shops in his day. The man who eventually helped McDonald's become a national name knew that soda fountain shops in the cities were dying and in their place new fast food restaurants were appearing in the developing suburbs of post World War II America. But when he saw how many multimixer machines the McDonald's brothers ordered from his company for their one restaurant compared to his other drive-in restaurant clients and how competitors were copying the equipment orders of McDonald's, he was intrigued to want to find out more.

"Kroc had just received yet another order from the McDonald brothers for two more units, the ninth and tenth," writes John F. Love in his book McDonald's Behind the Arches about how Ray Kroc bought a franchise and began franchising McDonald's. "'What are they doing with them?" Kroc asked Jamison, his West Coast salesman. 'Well, Ray, they use them all,' Jamison replied."

As a restaurant vendor, Kroc was an industry insider and smelled something was afoot. Kroc drove from the Chicago area to Dick and Mac McDonald's quick service restaurant in San Bernardino, California. He studied the store, made an order, ate their burger and liked it. But Kroc didn't stop there. Orders were served speedy fast through a service window and not by car hop, which had business ramifications.

Potential franchisees should be approaching their future business as an investor, not a buyer. They should ask—in what industry can I get the most bang for my hard-earned buck and efforts? How much can I make compared to other opportunities? And what industry looks like it is becoming better and better for a capitalist like me?

Find four different brands in a strong franchising industry 

Here's a suggestion to avoid confirmation bias. Once a strong blossoming industry has been discovered and selected, find four of the better franchise opportunities in that industry to put on a short list. That short list should be whittled down meticulously to one franchise system that stands out. Someone who has done strong due diligence should be able to talk about the pros and cons of investing in a franchise unit under each franchisor on their short list. They especially should be able to answer how much they can reasonably expect to make with that brand’s franchise if they were an average franchisee versus how much they could make with the others.

Investors should not just select a franchise to buy because its burgers taste best. A great burger and a good business are two different things.

Store profits are key questions to be answered for franchise unit investors. Knowing which industries have store profits that are more robust and that are increasing is an important part to any due diligence efforts in investing in a franchise unit.

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About Don Sniegowski

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Don Sniegowski is editor of Blue MauMau, the daily news journal for franchise & small business owners. Call him at +1 (270) 321-1268, tweet @bluemaumau or email don@bluemaumau.org.