What Does Net Profit Mean?

When considering a franchise opportunity, it is important that a prospective franchisee not overly fixate on the gross annual income (the amount of money made within one year before deductions). Rather, they should look closely at the net profit of the franchise and its locations. While gross annual income is the amount of money before any expenses are accounted for, net profit is how much money is left after a franchisee pays rent, payroll, royalties, utilities, franchise fees, financial charges, equipment leases and any security costs or insurance.

By understanding the net profit of a brand’s various locations, a potential franchisee can better determine if the brand is right for them, their financial situation, goals and expectations.

As net profit is critical data to a prospective franchisee, it is often included in Item 19 of the Franchise Disclosure Document (FDD) along with gross revenue. According to Franchise Business Review, franchise brands provide this information in the Financial Performance Representation section of the FDD to give candidates and franchisees a better idea of potential profitability — not just top-line revenue. Many franchisors use the data conveyed in this form to have frank discussions with franchisees about what they’ll need in terms of capital to be successful.

By taking a look at a particular brand’s net profits each year, a potential franchisee can determine if they are capable of supporting the business’s needs and still coming out cash positive. Franchise City recently reported that 51.5% of food franchises earn a net profit of less than $50,000 a year — and only about 7% of food franchises have a net profit over $250,000. The average net profit for all restaurants in the report was $82,033.

Long-time fast food staple, McDonald’s, is an example of a brand with great net profits. But that net profit gradually dropped during the pandemic, which might have been a deterrent for investors. The company's net profit reflected a sharp decline in 2020, resulting in temporary shutdown of several McDonald's restaurants across the globe. According to data from Statista, the brand recorded a net profit of approximately $4.73 billion in 2020 — a decrease from $6.03 billion in 2019.

Ultimately, by evaluating the FDD and gauging which locations are thriving, a franchise candidate can utilize net profit figures to determine their potential earnings and if a franchise is the right fit for them.