Technically, Franchise owners get paid by themselves. It means that they get into the franchise business to earn profits and not depend on a salary. It is because of this arrangement, the financial future of franchise owners is very promising. Even in the most competitive of markets, while franchising, a franchise owner can still spin profits from sales and service transactions as well as an optional yearly salary.
However, according to Glassdoor, there are arrangements with big businesses where they pay their franchisees a salary. The national average salary for Franchise owners is $72,286 per year in the United States.
Ways Franchise Owners Get Paid or Franchise Income Source
Sales and Service Profit
Profits from sales and service transactions are the lifeblood of a franchisee’s business. Profits accrue to a franchisee as a result of sales and service activities. After paying the overhead costs, this is what’s leftover (i.e., equipment costs and fees; inventory and supplies; staffing, salaries and benefits; a brick-and-mortar location).
Profit after Fees
There may be high up-front costs for franchisees who want to invest in company models with proven financial and organizational success methods. Franchise fees are two parts: an initial buy-in charge and a percentage of gross sales plus an annual lump-sum franchise fee.
For example, according to Investopedia, “Dunkin’ Donuts costs about $40,000 to $90,000 in initial franchise fees, 5.9% in royalties and 5% for advertising.” The first-time buyer’s price varies from $109,700 up to $1,637,700. A shop with $900,000 in yearly sales owes the business about $100,000. After adding the material cost of about $200,000, the franchisee is left with approximately $600,000.
After the expenses are taken into account, the profit reduces. Included in this are expenses such as mortgage/rent/utilities/labor/taxes, etc. Despite this, a franchisee working for a well-known brand will certainly wind up with a profit after the financial year, even if the owner’s hypothetical coffers are empty.
If a franchisor pays a yearly salary to a franchisee, the owner may potentially use the accumulated equity of a franchisee. If you’re a sole proprietorship or partnership, this option isn’t available for you. Owner withdrawals have an impact on working capital and may be taxed. All franchise owners contemplating accepting a salary should speak with a financial adviser or tax counsel to have their minds at ease.
Accumulated equity, in this context, refers to the value that has been built up over time in the franchise. This value can be a result of various factors, including successful operations, brand recognition, customer loyalty, and overall business growth. When a franchisor opts to pay a salary to the franchisee, it opens up the possibility for the owner to access this accumulated equity in a more structured and consistent manner.
However, it’s important to note that not all franchise arrangements offer the option of a salary. In many cases, franchise owners operate under a profit-sharing model, where their income is directly tied to the financial performance of the business. This model aligns the interests of the franchisee with the success of the franchise, as increased profitability translates into higher earnings for the owner.
The ability to use accumulated equity through a salary arrangement can be a significant advantage for franchise owners, providing a more stable and predictable income stream. This can be particularly beneficial in scenarios where the franchisee seeks a more regularized financial structure or wants to ensure a consistent personal income regardless of the business’s immediate profitability.
However, this option is not universally available, especially for sole proprietorships or partnerships. In these business structures, the lines between personal and business finances are often more blurred, making it challenging to distinguish between owner income and business profits. As a result, the concept of accumulated equity as a source for a salary may not be as straightforward or viable in these situations.
It’s crucial for franchise owners contemplating a salary arrangement to be aware of the potential impacts on working capital and taxation. Owner withdrawals, whether in the form of a salary or otherwise, can have implications for the financial health of the business. Understanding the tax implications and ensuring compliance with financial regulations is essential to avoid any unforeseen challenges in the future.
Given the complexities involved in financial matters, franchise owners considering a salary arrangement are strongly advised to consult with financial advisers or tax counselors. These professionals can provide valuable insights tailored to the specific circumstances of the franchise, helping owners make informed decisions that align with their financial goals and the overall success of the business.
Get Paid or Earn a Salary, Future of Franchising
Independent company owners must perform the hard work of business growth, branding, marketing, and product research, which a franchise owner may accomplish for them. Given the variables above, a profit plan exists, and the statistics point to a lucrative franchising business.
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