We all want to earn some good returns on every investment we make, and investing in a franchise business is no exception. However, calculating your return on a franchise (franchise ROI) is not as easy and straightforward as it might sound. ROI of run-of-the-mill investments like stock, real estate, gold, oil or bonds is typically simple and has a definite way of determining.
First Thing’s First: What’s ROI of a Franchise?
It's a yardstick for evaluating the efficiency of your investment in a franchise. In other words, the ROI determines how your investment in a franchise performed? Typically, the ROI is your net profit from the franchise venture represented as a percentage of the actual investment you put in.
Understanding the ROI of a Franchise
When it comes to a franchise, you are investing not just your money, but also your effort time, and skills you have honed for many years. The chances are that you ditched your 9-5 job to run your franchise business full-time. No matter how you look, understanding your investment towards a franchise is more intricate than you think. As such,quantifying the return on your franchise investment can be even more complicated.
Another thing that complicates the calculation of ROI of a franchise is that you might not turn a profit in the fast few formative years. Like any new business, a franchise can end up making losses in the first two or three months of opening. In fact, most franchises take up to 18 months to come out of the red and even longer to break even.
How to Calculate ROI of a Franchise
Again, finding out your annual investment in a franchise can be hard, if not downright complex. The good news is that you can figure out the net profit you made from your franchise without much hassle. Use the following steps to estimate the true ROI of your franchise:
(1) Put a Price on your Time and Effort
Start off with an objective estimate of how much effort and time you are willing to dedicate towards your franchise business. If you are looking to put in 4 hours each day, how much do rate your hour? In practice, most franchisees forget that a lot of hard work and time go into running a successful franchise. Are you willing to devote your time and pay the price?
(2) Ask Around
Have a sit-down with franchisees that have been on the franchise in the last five years or so. How much worth do they put on their time and effort running the franchise? If it’s convenience store, for instance, do they have family members helping them? How many hours do they put in a week? More importantly, what personal factors can interfere with giving your all to the franchise?
(3) Opportunity Cost of Capital
Think about: how much would you make if you put your time and effort (and money) in a safer investment? So, factor in the opportunity cost of capital when estimating the ROI of your franchise.
(4) Juxtaposing the ROI
When you have estimate value of each investment, including capital, time, effort, and skills, you put into the franchise, it is high time you evaluate the ROI of a franchise makes sense to you. If you are making $50,000 from a franchise annually, you’re probably getting a poor return on your investment. In fact, getting $50K or less a year from your franchise means that you are making as much as someone earning a minimum wage. That’s a big no-no.
If you can make more from your 9-5 job or working for someone else for fewer hours, then investing in such a franchise is not worthwhile.
What’s a Reasonable ROI for a Franchise?
The ROI of a franchise usually range between 25 percent and 50 percent, or even higher for disruptive franchises.So, if your return on investing in a franchise is below 25 percent, then you have a big room for improvement.
Franchise ROI Wrap-Up
If you are thinking of investing in a franchise, you must be able to estimate the true ROI. As such, you’ll need to collect as much financial data as you can from other franchisees, FDD, and the franchisor itself. Moreover, figure out how much personal commitment you are willing to put in, and calculate the fair market value for your time and effort.