There are a lot of franchise business models that franchisees can pick and select which they think is the best for them. However, unlike any other investment platform, a franchise investment has most likely soft benefits. It takes a lot of time, extra effort, risk, and money.
On top of that, a franchisee also has to consider the weight of the possible franchise ROI.
In this blog, I will focus on the 5 things that you have to expect:
What’s in it for you? Well, if I am going to plan franchise ownership, I will carefully study the range of my estimated return on investment. This is to calculate if my profit will be equal to a higher ROI that will give me good money, especially in my startup phase.
So the obvious question is: How are you going to make up for your invested capital?
Let me discuss the details step by step. And at the end of this blog, you will have better insights into how to franchise ROI works in the franchising industry.
What is Franchising ROI?
ROI means a return on investment. Simply, franchising ROI is:
The performance of franchise ROI can be likened to a soccer team. Each business owner has to work with the franchisor to obtain a goal of gaining a reasonable ROI and attaining success in the stock market. They will work as a team to gain more than how much they invested.
A positive ROI is not always in a winning situation.
If you already have your own business, I know you agree that being realistic is more essential than being idealistic when it comes to your invested capital.
At times, you have to even invest more money and double your work hours in a few months before earning a profit. Most franchise owners are well aware of these risk factors either.
Read along to answer these questions.
5 Things To Expect In the Return From Your Franchise Investment
1. Inconsistency in return rate
I did some research on a number of franchises and they don’t seem to be very consistent in terms of the rate of return on investment.
In fact, it sometimes appears that there is very little correlation between the total investment and the amount of money I can make in the business.
You might ask: Is there a rule of thumb that applies to ROI in franchise opportunities?
The real answer is so counterintuitive for most investors to accept. Why? Because when you think of investing in real estate – the stock market or somewhat a passive investment – there is usually a fairly direct correlation between the amount invested and the total return.
Somehow, it is the same with most new businesses and a few companies. Besides the fluctuations, returns of 10% to 15% per year on invested capital are normally analyzed as very good. The business is considered to have good investments in this case.
2. The type of franchise is another factor
There are various types of franchises but I will be explaining the 2 major ones –
1. Product distribution franchises
2. Business format franchises.
For product distribution franchises
It is a supplier (franchisor) – dealer (franchisee) relationship. Products related to this are mostly massive production of vehicle parts, appliances, vending machines, beverages, etc.
For business format franchises
It offers fair market compensation through a franchise agreement. The franchisor will provide the franchisee the rights to use and operate a business using their name and trademark. However, a franchise owner should strictly follow the company’s rules.
In these two different business types, the franchise ROI or the return on your investment is still at work. Once you decide on a specific franchise model you are going to trust your initial investment to, do not forget the other factors that are tied up with the investing elements. What are the investing elements?
On a final note, passive investments depend on the type of franchise you are going to invest in a certain area considering your target market.
3. What is the potential return?
Most people intuitively understand that the more you invest, the more you’ll get back. “Spend more, get more” is an accepted fact of life. The problem is that this “fact” just isn’t usually true in franchising.
The flaw in applying this same logic to franchising is that the investment is normally not passive in owner compensation. In addition to your capital, you are investing a fair amount of your time and management talent as well. You should be able to achieve a good return on both investments.
Therefore, since you are making two investments, when you look at ROI in franchising, it should be considerably higher than what you can earn in a passive vehicle.
Returns in franchising vary all over the board.
In most cases, the return (expressed as a percentage of the overall investment) is usually smaller on high investment franchise opportunities than on low investment opportunities. Whatever would be the outcome of your passive investment, the reason has everything to do with leverage.
The real opportunity for leverage in franchising relates to the value of the investment you’re making in your time and talent. This is where a great franchise system can utilize this asset to increase your returns dramatically.
In other words, in most franchise businesses you will get very little leverage in relation to your capital investment. As a matter of fact, even if you use debt to increase leverage, your debt service will simply decrease the overall net cash return produced by the business.
As a general rule of thumb, you should never invest in a franchise unless you believe (based on your own investigation). The average annual income return from the business will be equal to at least 30-50% per year of the total initial investment for the franchise unit. This total investment we’re referring to includes all debt and working capital reserves needed to start the business.
If the return isn’t at least this high compared to your average income, what are you working for? You’d be better off keeping your current job and investing your money or capital passively.
So, how do you find a franchise with a great return on your investment? The first answer is not to look at the most expensive opportunities. Focus on fairly easily trade in the market.
Of course, you want to find the ones with great management leverage. These are often franchises with total investments of less than $200,000 and in some cases less than $50,000.
4. Franchise ROI Estimation is important
The next step is to carefully investigate the estimated earnings of a typical franchise before your third year of operation. Keep on checking your passive investment dollars calculation. Make sure you know what the average performance is, not just what the best marketing materials can achieve.
If the business is not making the returns by the third year, at the latest, keep shopping. There are plenty of great opportunities out there that will meet or exceed this standard in a relatively short time frame. Both your money and efforts are worth the wait.
5. Market demands affect Franchise ROI
There are compelling soft benefits if you choose the best franchise business in customer base factors. Let me take as an example the Chick-fil-A fast-food company whose specialty is chicken sandwiches. This is a recognizable brand that has more than 2, 700 franchises across the United States. Their business model is in demand on the market because they offer something that consumers will prioritize buying – food.
Obviously, the most popular franchise industry is food and restaurant. Below is the list of the next most common industries in the franchising world.
10 Franchise Industries
1. Clothing business
2. Home cleaning and maintenance
3. Automotive franchises
4. Daycare centers
5. Health and Fitness
6. Pet Grooming Shop
7. Salon and Spa franchise
8. Driving School business
9. Hardware store franchise
10. Cosmetic franchise business
Always remember that the return on your investment at times depends on how engaging your product is to the market. For example, you will never think of putting up a children’s play business in the middle of nowhere without surveying the population for your target market – toddlers and kids.
So, you might consider these questions:
The point here is that, before you decide to invest in a new business franchise, I suggest you do deep research. Make use of the time investment first.
Higher ROI is not always equal to how high you are going to invest in a franchise. However, even your little investment can produce positive returns as long as you have the perfect business structure.
After considering all of the 5 things to expect in franchise ROI, I can say that franchising is still the best way to invest your hard-worked earnings. A good franchise offers you a lot of opportunities to grow in this industry, and be financially stable.
No one knows, you might start with struggling profits now but as you continue and strive in the business, you might end up owning more than one franchise model in the future. There will be no easy beginnings but why not put yourself to a real challenge.
To sum it up, be realistic with your expectations on franchising ROI. You may get the same return on investment, or you may lose or win the game. However, if you want to be a sure champ, I encourage you to get a franchise coach who can assist you in your goal of owning a successful franchise.