Finding a franchise with the best ROI (return on investment) can feel like an impossible task. If you have started to do your due diligence in searching for a franchise with a solid ROI, you know what I am talking about.
Trying to factor in EBITA, economic factors, and so many other factors, it’s no wonder people don’t get paralysis through analysis.
Is it like trying to do a cost/benefit analysis of a current bad relationship and switching to a possible mail-order bride? OUCH!
Let me explain.
ROI is simple math if you are buying stocks or bonds. If you invest $100,000 in stock and sell for $110,000, you have a 10% ROI. It’s passive income and safer than buying a franchise.
Question: What ROI would you expect if you continued to invest your savings instead of buying a franchise? _____%. Whatever percentage you write should be subtracted from the ROI if you buy a franchise. After all, your invested money would be compounding interest.
Calculating your ROI in franchising is different. Franchising is a business you will most likely actively be working on. It’s not passive, like investing in the market. This difference makes it impossible to use a simple formula. So, I believe there are three different ROIs that franchises should be looking at:
Current Salary $90,000
Purchases – $100,000 franchise
Finance ($30k cash deposit, SBA loan $70,000 at 8% interest for ten years)
Amount Due at Loan Maturity $179,084.77 Total Interest $79,084.77
The experts say that by the second year, you should have the same pay as your previous salary of $90,000 plus an additional 15%-30% of your initial investment. In other words, by the end of the second year, you should earn $105,000 – $120,000.
However, you also need to factor In the following:
Advantages:
Because you are no longer working at your previous job, how has your state of mind improved?
Can you now play golf, coach your kid’s soccer team, and have a more flexible schedule?
How does being in charge of your day feel?
These are considered soft ROI.
It’s hard to believe that I could not find another site mentioning the return on investment a franchisee gets when selling the business.
A business built on sound principles and quality service and generating solid margins of over 15% has real value. The person buying the business can jump in and start getting paid immediately.
A general rule of thumb is a business is worth about 2.5 -3 times the owner’s compensation. If you sell the franchise when your compensation is $200,000, then the company may be worth $500,000 or more! That’s a heck of an excellent ROI.
Consider the alternative. If you stay at your current employer, they most likely will take you to Chuckie Cheese for lunch.
Most franchisees don’t consider selling their business until they have been doing it for a long time and are getting burnt out. The error in procrastinating for the eventual sell date can add a year or two, maximizing your company’s value. Accountants will review your P&L statements for at least the previous three years. Each year showing growth and high margins are the perfect time to sell.
I own a painting and handyman franchise, and I ask my franchisee to keep working on their list of top prospects in their territory. They would be proud to show a list of 15-20 excellent prospects to a prospective buyer. That’s how you get tremendous ROI on your franchise.
First, don’t pay too much attention to what the franchisor says about net profit. At least take what they say with a grain of salt. They are probably unethical if they declare earning claims outside of Item 19 in the FDD. Franchisors are restricted from making earnings claims and can lose their license to sell franchises. The amount of money one franchise makes compared to another can be a difference of millions of dollars, so it is best to find an average.
This will require picking up the phone and asking questions such as:
What was your income the first year and last year?
How many hours do you work a week?
Do you have flexibility in their schedule?
How long have you been a franchisee?
How is the training and support?
Are you glad you bought this franchise?
Existing franchises might not know what past franchises were sold for, but they might be able to give you contact information. That would be precious information.
The more expensive the franchise does not necessarily correlate to a better ROI. It is usually the opposite. Expensive franchises involve construction and leases; getting out of the red can take 2-3 years. More often, the franchises with the best ROI will have start-up costs under $200,000.
Let’s start with a business with low overhead, which means a company you can operate from home.
The first goal is to start to have income come in quickly. Services should have margins of 15% or higher.
Most people who buy a franchise don’t have 18 months to last without paying themselves.
Is the industry recession-resistant?
Does the territory have protection from other franchisees?
Is there a big enough market in your territory?
How do the ongoing fees of the franchise compare to others in the industry?
The last question is an important one. I’ve compared my franchise to over 11 other painting and handyman franchises and found some will take over $60,000 a year more in fees! Talk about killing your ROI! Yes, two different franchises that generate the same gross sales can pay a difference of $60,000 per year.
I wrote this to be as unbiased as possible. I know I am a franchisor, but I want you to find the right franchise. When searching for a franchise, you now see there is real homework to do.
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Email: dklappenberger@klappenbergerandson.com
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