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In a five year franchise agreement, typically how soon does a franchisee start to make a profit?

Franchise Solicitor John Pratt

Much does, of course, depend on how good is the franchise, the franchisor and the franchisee! Nevertheless, the reason that the great majority of franchise agreements in the UK last for five years is that historically franchise owners have made a substantial loss in the first year - so you need to have sufficient working capital to allow you to trade through the loss making stage at the beginning of the franchise - make a small loss/break even in the second year, break even or make a small profit in the third year and are in substantial profits in years four and five. This timescale set out above is, of course, attractive to franchise owners bearing in mind that they will be able renew their franchises at least once provided that they have not been in breach after the five year term.

In some franchises such as McDonald's or KFC which involve very high initial expenditure - related to property issues - a longer term franchise agreement is offered to cater for the fact that it will take longer for the franchise owner to trade at a profit in view of the very high property costs which will have been incurred.

John Pratt
For Hamilton Pratt

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