Franchise businesses have shown steady growth in the Indian economy. Some sectors such as food and beverage service have seen a wide scale of penetration across the markets whereas franchise business has not shown expansion in certain sectors such as home services. This is because a profitable franchise model of business is feasible in some sectors and in some sectors it is not.
Naturally, an entrepreneur would wish to reap the highest profits that are possible through his franchise business. This goal can be achieved by a meticulous study of the profitability of different sectors.
At a first glance, it seems that the quick service restaurant sector, petrol pumps, real estate and brokerage, hotel business, travel and tourism, education, and health and wellness are the sectors where franchise businesses are doing well in India. In a way, franchises in the service industry are profitable as well as fast growing.
If you are considering a franchise business opportunity, it is essential to study the profitability of the franchise business in various sectors before making a decision. There are many factors affecting the profitability of a particular sector and it is also very location specific. The following are the main points to be considered before investing in a franchise.
Profitability can vary greatly according to industry:
IT consulting and software, utilities, health and wellness, automotive, oil exploration and production, realty, broadcasting and television industries are the top performers in India with respect to net profits earned by a business. You will easily see that not all of them are franchise friendly. It will become necessary to sort out the sectors which are profitable as well as franchise friendly in order to pick the right franchise. There are many financial reports by reputed consultancies which you can refer for details.
Analyze industry trends:
When an industry performs well for many years, it is assumed to be a sound and profitable investment in general but that is not the correct way to choose a sector to invest in. For example, investing in real estate business was profitable for over a decade in India but slowly it slumped and it is no longer considered profitable. The trends in an industry can be identified and verified by studying the quarterly performances of established businesses over a few years. Industry trends give an early indication of an impending situation regarding the profitability of an industry.
Volume vs high-profit margin:
There are mainly two methods of ensuring huge profits. Either a product or service has to be sold in high volumes or the profit margin has to be generous to generate wealth. Of course, the star would be the one with high volumes and a high-profit margin too. If you are extremely lucky, you will find a franchise business that falls in the last category. If not, you will have to decide between the two options in order to earn high profits. At the same time, do not forget to review whether a business is adaptable to the franchise business model or not.
EBIT vs net profit:
Analyse the sectors of business that you have short-listed based on those having high earnings before deduction of interest and taxes as compared to businesses with a high net profit. You will see a difference in the rankings of the businesses short-listed by you. Taxation policy and taxation structure established by the government being different across goods and services, it does make sense to keep an eye on it. India is going under a major change in its policy for tax so it is better to be updated with the latest regulations. For beginners, it may be easier to deal in a sector and a business model that has a simplified structure.
Earning in profits after-market salary:
For the smaller franchise businesses, one should take into account the salary one could have earned in the same sector based on qualifications and experience. Some skill sets are so much in demand that it may turn out that there is not much difference between a salary and the profits proceeding from a business in the same sector. It does not matter much if freedom is your main objective but if not then you may have to make many considerations.
Labor cost:
The franchise industry is doing well in the service industry but this industry relies on human resource management. Check the cost of providing labor in any franchise business that you are considering. It varies according to location and demographics. It may turn out that the business model is excellent but profitability varies greatly with variations in labor cost.
Rental:
Rental lease is going to be a big cost of your franchise establishment. Even if you have your own space to operate from, you have to consider the opportunity cost of leashing out pace to some other business. Metro cities have very high rentals and restricted spaces. While assessing the profitability of a franchise business, one should assess the rental cost that is to be borne.
Loan rates:
Banks are willing to give loans for franchise start-ups but you should check other details with the bank. Banks have different interest rates based on lending rates for different sectors. Sometimes the processing fee is high too. Usually, high rates of a bank loan make a business lose out on profit.
Risk:
Be very careful to assess the balance sheets and background of the franchisor before you make a decision. Some sectors have high risk and high returns in profits. The risks arise from political and environmental factors that cannot be controlled. In such a scenario, assess the risk of discontinuing a business before it even breaks even. All investments can be lost and debt can spiral in such an event. It is best to avoid high-risk franchise investments even if there is a scope of high profits.
Demand and supply:
A product or service may be demand but there may be ample suppliers too. This means an increase in competition for the market share of that particular product or service. This situation eventually leads to competitive pricing as has been observed amongst the pizza franchises. This obviously results in decreased profits.
Before deciding upon a sector to invest in a franchise business, verify how franchise-friendly is that sector by studying the number of franchises operating in the sector and their success rate. Study the profitability of a sector by understanding the tax applied, interest rates, labor cost involved and the scenario of demand versus supply. Assess the various risks involved with a sector and with the promoters of a franchise business. If you cannot grasp the financial details or economics of business very well, do not hesitate to approach a franchise consultant who will throw light on the lesser know details of the business too.
Once you have sorted out the most profitable franchise business opportunities, do not forget to prioritize them according to your interests and knowledge. External risk factors and business model definitely matter in the success of a business but internal factors matter the most in any business. If you have a good understanding of the nuances of the franchise business that you start, you will naturally be able to perform well and earn good profits.
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