Time to Profitability Shorter in Less Rural, More Populated Areas

Time to Profitability Shorter in Less Rural, More Populated Areas

 (Newer franchisees taking longer to become profitable)

It is often said that the most important criteria in determining success for a local business is location. What this means, however, has always been subject to interpretation.

A downtown business may have lots of potential customers but also lots of competition, high rent and more staff to service these customers. A rural business may have fewer potential customers, less competition and fewer fixed costs such as rent. Success depends on how a business is able to balance its revenues and expenses to produce the single factor that defines viability – profit. While a successful business involves many qualitative factors not measured in the National Franchisee Survey , we are able to look closer at some demographic information.

For businesses in operation 10+ years, one third of respondents state that they reached profitability in less than one year. Over 50% state that they reached profitability in less than three years. This is a dramatic contrast to newer franchises where less than half report being profitable in the same period of time. The more recently a business has opened, the longer it appears to take for them to achieve profitability. As a basis for comparison, Table 1 includes the percentage of stores not yet profitable based on years in business. As expected, this percentage decreases over time.

Franchises located in population centers of 250,000+ (Table 2) report achieving profitability in a much shorter period than those in smaller population centers. Frequently, these larger population centers are more costly areas in which to operate and often have more competition. Nevertheless, these operations report a much faster time to profitability.

Likewise, we found that franchises located in rural areas (Table 3) had a longer time to profitability than their urban and suburban counterparts.

Despite what can be assumed to be higher operational costs and cash flow requirements, it appears that franchises located in more urban and higher population centers took considerably less time to become profitable than those located in smaller/rural areas.

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FranchiseFacts  – Capturing the franchise experience

Perry Shoom, FranchiseFacts
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