As a franchise consultant, when asked to evaluate a franchise opportunity for a client interested in becoming a Franchisee, one of the most important considerations is the anticipated return on investment for the particular franchise. Because this is a critical issue, consider it when you franchise your business.
When deciding to franchise your business, remember that franchises come in many sizes.
Some require an initial investment under $25,000 cash, while others involve an outlay in the multiple millions to launch. Some franchises generate annual revenues under $100,000, and some have yearly sales in the millions. With all these variables, how do you evaluate a specific franchise opportunity?
One good benchmark is the anticipated return on investment. Consider this issue when you franchise your business.
When you franchise your business, the return on the Franchisee’s investment can come in various forms, including:
- The Franchisee’s salary
- Perks such as
- Car allowance
- Insurance such as health, life and/or disability
- Free meals
- Reimbursable travel
- The costs of a cell phone
- Organization memberships
- Dividends
- Profits from the business
In other words, look at all the combined monetary return or its equivalent that may accrue to the Franchisee when you franchise your business.
When doing your calculations, remember that if a portion of the investment is financed, the costs will be paid out of cash flow. Explore whether a portion of the Franchisee’s initial investment can be financed when you franchise your business.
Here’s an example of calculating the return on investment for a franchise opportunity:
- For this example, the initial cash investment is $150,000.
- The franchise is expected to generate the following positive cash flow in its first three years of operations:
- Year 1: $25,000
- Year 2: $75,000
- Year 3: $100,000
- Total positive cash flow over first three years of operations: $200,000
The franchise has earned back the initial cash investment of $150,000 in under three years. While there are clearly other considerations, the franchise opportunity in the example does provide a fair rate of return. This is a big positive when deciding to franchise your business.
Remember, unless they are properly disclosed in the Franchise Disclosure Document, you cannot make financial performance representations (FPRs) to prospective Franchisees when you franchise your business.
FPRs when you franchise your business have been addressed in previous NFA blogs including:
Thinking About Franchising?
NFA Franchise Consultants have the experience to help businesses franchise. Just watch and listen to some of our client case studies and video testimonials. We can HELP YOU and it doesn’t cost anything to call and talk to us!
So, if you are still asking the “should I franchise my business” question over and over with no clear direction, give us a call at (706) 356-5637, or contact us through our online form. We look forward to helping you take your business to the next level and beyond.