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What Factors Determine a Profitable Franchise?

By Osmand Vitez
Updated May 17, 2024
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Franchises are a business model where an individual can pay money to a larger organization and operate a business using the latter's name and production methods. A profitable franchise depends on a number of factors, including aid from the franchisor, brand name recognition, location of the business, current market conditions, and available skill levels of potential employees. Many different franchises are available in the business environment, including fast food, cleaning, repair services, and retail stores. A profitable franchise, however, can be much harder to find.

There are varying levels of involvement a franchisor may have with its franchisees. While most of these companies are involved in some way, the different levels may come at increased costs. All franchisees will pay money upfront, often a considerable amount, to buy into the business model. The franchisor will benefit by running a profitable franchise operation, so it will typically provide basic startup services such as location selection, initial training, and operational support for the first few months. After this initial startup period, franchisees may need to pay ongoing fees to retain management support.

A profitable franchise also depends on the brand name recognition of the franchisor. This is often a major reason entrepreneurs decide to operate a franchise. Brand name often comes from a wide customer base is often the best type of franchise operation. Customers who have a good awareness of the franchisor's products or services will likely view franchises in a favorable manner. This is will benefit the entrepreneur, as running the franchise according to the organizations standards will often translate to a profitable franchise as customer expectations can be easily met.

Current market conditions are another factor that can separate a potentially profitable franchise from a business bust. For example, if a large number of fast food hamburger joints already saturate the market, opening another may not lead to high profit levels. Starting a new taco stand franchise may be more favorable as it gives customers an option in terms of dining out. Entrepreneurs should also consider the price point of goods sold through the franchise. High priced goods may not be sustainable for a new franchise.

Employee skill levels will also dictate a franchise's profits. While many franchises can use lower-skilled employees for their operations, there is often a need for managerial staff. Managers must have certain skills for working in the franchise. Coming to work on time, negotiating problems among employees, working with vendors, ordering product, and creating worker schedules are often necessary management tasks. Insufficient levels of skilled employees can result in higher costs to the franchise.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
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