Though you may want to own a franchise because it allows you to be your own boss, set your own hours, and call the shots, the money is important, too. All franchisees want to run the most profitable franchise possible. Franchisees often enter into the franchise agreement with an idealised view of how things are going to turn out. In many cases, they don’t realise that running a franchise is a tough job and that it can take a serious amount of time for you to begin to turn a profit. Then comes the issue of how much you should pay yourself.
How long will it take for you to earn an income?
How long is a piece of string? It’s difficult to know how long it will take for a franchise to turn a profit. Most franchises will be able to provide you with a rough estimate, but this will be a guestimated average rather than any concrete figure. There are an incredible number of factors that could influence the amount of time it takes to turn a profit and the vast majority of them are far beyond your control. They include market conditions, the amount of work you put into the franchise, your franchisor support system, and blind luck. Though most franchises will be profitable within the first year, this isn’t always the case, so make sure you stay patient and don’t give up too easily.
You’ll lose money at first
However, we can be sure of one thing – you won’t be making any money in the first few months and you’ll definitely be losing a fair amount as you invest in the business. This means that you’ll need to have some savings to keep you going until you do start turning a profit. This situation is only exacerbated by the fact that many franchises are likely to be operating on a 30-day invoice system and many businesses are notoriously slow at paying. In order to ensure that you’re secure for the foreseeable future, you’ll need to calculate how much you need to comfortably live on. This amount will vary from person to person, as we all have different needs and a different definition of what constitutes ‘comfortable.’
What’s a comfortable amount to live on?
The best way to calculate how much you need to survive during this period is to create a record of all your living expenses. Start with your daily expenses, then move up to weekly, monthly, and annual. It’s important to consider all your expenditures, particularly those that are vital to your financial and family security. These might include mortgage payments, university tuition fee savings for your children, or finance payments on the new car you just bought. Likewise, it’s essential to consider the little extras and luxuries that soon add up. Unless you’re capable of living a life of complete solitude, you’ll have to factor in the occasional meal, drink, or trip to the cinema, too.
Do your due diligence
Due diligence is an essential part of the franchisee preparation process. You should never sign an agreement without having calculated the franchise cost, how much you can expect to earn from the venture, and whether the franchise is a financially viable investment opportunity. Your due diligence should also provide you with a vague approximation of when money should start coming in. Though this approximation will be largely determined by financial information offered up by the franchisor and franchisees, it should allow you to plan and prepare for turning a profit.
Average salary of franchise owner
At the start of your franchise ownership, you will have most likely drafted a business plan with the help of your franchisor. This will set out short and long-term goals, as well as what will happen with the money you make from the franchise and where you hope to be in five or ten years’ time. You may also have crafted your own plan. Your stated aims can have a big impact on when you can expect to start paying yourself a wage and how much it will be.
For instance, if you’re planning on building up the franchise from nothing and then selling it at a profit, you’ll need to think about maximizing the value of the business when you present it to a buyer. This may mean taking less of an income out of the business. Similarly, if you’re planning on building the franchise up over a number of years, you may want to draw a smaller income and leave money in the business for reinvestment. However, if you’re hoping to get rich quick and make as much money is as short a period as possible, you’re probably best taking as much as you can from the franchise profits, as soon as you can.
Tax and NI
Tax and National Insurance contributions can have a big effect on what salary you draw. In most cases, the various tax calculations are too complex to cover in any detail here. Consequently, it’s advisable that you seek financial assistance and guidance from your accountant or financial advisor before you make any decision about the precise amount you take as income. What you end up paying in tax is likely to vary according to how you set up the franchise and whether you’re acting as a sole trader, partnership, or limited company.
How much you choose to pay yourself as a franchisee will largely depend on your specific circumstances, goals, and long-term plans. There’s no way of calculating when your business will begin to turn a profit and it’s completely up to you how much you decide to take once it does. However, it is a good idea to ensure that your salary reflects your long-term aims and objectives. It’s also a good idea to consult a financial advisor and get an expert opinion. Taxation can have a big impact on how you decide to pay yourself and it’s many complexities deserve the attention of a trained and qualified professional.