Waiting for payday: how much should franchisees pay themselves?
Posted 15/02/2017 : By: Debbie Dennis
Some people buy a franchise because they want to choose their own hours. Others have an entrepreneurial hunger but want the reassurance of going with a brand that’s already well established. Whatever the reason, all franchisees care about their payday: the point in their journey when they’ll be able to assign themselves a comfortable income.
It’s impossible to give an average figure for how long it takes franchisees to start paying themselves an income, as franchise models can differ wildly. But it’s safe to say that very few franchisees will be able to draw an income in the early days. “The reality is that the first three months are hard and you’d be lucky to make any money at all while you’re starting to find clients and have a 30-day invoice period,” says Richard Langrick, franchise consultant at Ashtons Franchise Consulting Norwich. “So it’s important to have a nest egg of savings.” That said, Langrick doesn’t think you should hang about forever without paying yourself a penny. “You should be able to pay yourself a wage you can live on within a reasonable period of time,” he says. “You’ve got to live, after all.”
To work out what your idea of a comfortable wage is, it’s important to factor in all your living expenses – including monthly, quarterly and annual costs – and put them into your personal balance sheet. This tally might include necessary outgoings like mortgage payments or university fees for your kids but could also extend to allowances you might want to factor in to help you live happily, such as having enough for the odd meal out. And it’s important you aren’t too strict when setting your personal income, as this is what you’ll have to live on for six months – quite possibly more. “Some franchisees think they can exist on a wing and a prayer and make the classic mistake of being underfunded,” says Langrick. “But if you borrow too little or misrepresent to the bank what you’ll need to pay yourself you could run into cashflow problems.” So while you may well have to trim some of the indulgences you enjoyed while being employed, such as multiple holidays a year, the projections you make still need to be realistic.
Doing your homework
As they prepare themselves for the reality of running a business, the onus is on franchisees to do their due diligence and not just take the documents the franchisor has provided at face value. “While most franchisors understand that the law requires them to represent the facts accurately, anyone thinking of buying a franchise should go a step further and speak to as many franchisees in the network as possible – not just the ones the franchisor wants you to speak to,” says Andy Myers, franchisee of Transworld West Kent, the business brokerage firm. “That will tell you the truth about projected earnings and no franchisor worth their salt will stop a potential franchisee from doing this.”
It’s also a good idea to scrutinise the figure the franchisor provides you with regards to the average length of time it takes franchisees to break even – or, in other words, reach the point at which they’re generating enough revenue to cover their costs and start making a profit. The figure they provide is just an estimate based on other people’s experiences: your journey will depend on a whole host of other factors, including how much effort you’re prepared to put in. “For a business like ours, how successful you are and how much you can pay yourself is largely down to how hard you work,” says Frank Milner, president of Tutor Doctor, the home-tutoring franchise. “While I know that many franchisees are able to start paying themselves within six months, generate £100,000 in turnover within a year and break even within a year or two, many achieve this more quickly or slowly, depending how diligent they are.”
The length of time it will take you to break even will be affected by factors like how much investment you need to recoup, the hours you put in, the wage you pay yourself, demand for your services, your pricing strategy, how much you invest back into the business and fluctuations in your operating costs. “While every franchise is different, broadly speaking a franchise with a lower level of investment – such as an online business – should expect to break even within a year, while a more expensive business – like a food retail franchise – may take three,” says Myers. “It’s a case of risk versus reward: while cheaper franchises allow you to make ends meet quickly but won’t make you millions, the investment for a franchise with more long-term profit-generating potential can take longer to pay off.”
Knowing what to expect
So given the variables at play when it comes to projecting the size of a franchisee’s pay cheque and the length of time it can take for them to break even, it’s crucial that franchisees go in with realistic expectations. “Some franchisees have a misconception that franchising will be easy and quick but the reality is that whether you own your own company or have bought a franchise, business is hard,” says Milner.
One franchisee who’s going in with her eyes wide open is Stella Sass, who has recently bought the Liverpool territory for Promedica24, the live-in-care franchise. “I don’t have any clients yet and I’m not expecting to pay myself a wage until I reach month eight or nine but that’s OK because I knew customers wouldn’t be knocking on my door from day one,” she says. “I was fully aware that it would be a slow burn.” Given that her audience is very niche, Sass has set aside funds from her redundancy package to tide her over as she makes contacts in the industry. She also has a plan B in place. “Of course I want my franchise to succeed but I’m undergoing teacher training just in case it doesn’t,” she says.
Going to plan
It becomes even more vital to stick to the projections you’ve made in your business plan once the revenue starts rolling in. “The trouble starts when folk who aren’t used to working for themselves generate turnover very quickly,” says Milner. “They see money coming in, think ‘I’m rich’ and start spending more freely. But just because it’s in your bank account doesn’t mean it’s earned yet: you still have to pay your overheads before you can give yourself a wage.” Given that most franchisees aren’t finance experts, it’s easy to see how they might be tempted to treat themselves to a more generous allowance once business picks up, which is why they benefit from having a formal structure in place. “It’s important that you plan well, bring in specialist help from an accountant and constantly review your targets and business plan rather than allowing it to collect dust,” says Myers. “The franchisees that don’t end up achieving their targets have often failed to look after their financial fundamentals properly.”
Clearly there’s no hard and fast rule when it comes to how swiftly franchisees can make a good living or eventually break even. But what’s most important is that they go into their venture under no illusions about what building a profit-generating franchise takes.
Maria Barr - Elite Franchise