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Franchise Research: Estimating Your Return on Investment (ROI)

By FranChoice Blog | Jun 6, 2018

return on investment ROI

How do you find a franchise with great returns? A wise investor, whether he puts money in the stock market or real estate or even collectible figurines, always considers the return he can expect on his investment. While investigating franchise opportunities, be sure to look carefully at the company’s potential return on investment (ROI). And because a franchise purchase involves investing both your time and money, you should expect a higher ROI than you would from a passive investment of money only. Your franchise ROI will depend on many factors, including the structure of the franchise (retail vs. service), the length of time your franchise has been operational, the degree to which you understand and embrace the system, and your enthusiasm for the business.

Rule of thumb?

When you participate in a passive investment, you may be satisfied with a 10% to 15% annual ROI. If you invested $100,000 in the stock market and earned $15,000, you’d be pretty happy. To make more money, you’d have to invest more money. Most people accept the generalization that the more money you invest, the more money you’ll get back.

Similarly, people often assume that the more you invest in a franchise opportunity, the higher your return. However, there is often little correlation. Returns in franchising vary greatly, depending on the concept, industry, market, and individual operator. In many cases, the franchises that offer the greatest ROI are those that require a total investment of less than $200,000, sometimes even less than $50,000.

Gathering information

While investigating a franchise, you’ll want to determine the average earnings of a typical unit during its first three years of operation. Sometimes you can find this information in the franchise company’s Franchise Disclosure Document (FDD). Item 7 details the investment required and Item 19 specifies the earnings of units within the franchise system. However, not all franchisors include Item 19 in their FDD, as it is optional. If this information is available for the companies you’re researching, you should be able to project the average three- to five-year returns on investment.

You may be able to gather the most useful information about unit performance directly from current franchisees. Item 20 of the FDD provides contact information for current and former franchisees. Initiate phone calls with a number of franchisees and ask them about financial performance and operating costs. Thorough research should enable you to determine the high and low end of the range. Keep in mind that the location or territory you are considering may only perform in the average range. Make sure that the average is a figure that will make you happy.

 

Selecting a good franchisor and developing a solid financial projection are key in starting on your path to successful business ownership. Make sure you start with your eyes open and realistic expectations.

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What’s Next? Your Tasks as a New Franchisee

By FranChoice Blog | May 30, 2018

new franchisee

A great sense of accomplishment comes with finding your perfect franchise opportunity and signing on the dotted line. But that’s only the beginning. Many things need to happen between the time you sign the franchise agreement and the day you open your new business. As a new franchisee, you’ll have many questions. What do I need to do to get my business open and running? How long will it take? What tasks will I need to complete along the way?

Because no two franchises are exactly alike, there’s not a “one size fits all” checklist for a new franchisee. However, some general guidelines hold true for any high-quality franchise company.

Franchise documentation

The franchisor will supply you with new franchisee materials. Most franchisors provide training manuals describing the franchisor’s operating systems, marketing procedures, and new-business setup. Additional materials and tools may include a company intranet, training videos or DVDs, and sometimes even personal visits by company employees.

These materials will explain how the franchise system works. They’ll address the tasks ahead of you. The franchisor designs these materials and this process to move you through the learning curve as quickly as possible.

Critical path items

If your new franchise will require real estate space (e.g., a storefront or industrial space), the franchisor will specify critical path items for getting your unit open and running. These tasks will include selecting and buying or leasing the real estate space. You’ll learn about zoning and permit issues. The franchisor may help you find architects and contractors and assist you with signage, product, furniture, fixtures, etc.

Additional support from the franchisor may include ideas and resources for employee hiring (especially in franchises that depend on a large minimum-wage workforce or employees with special licenses). Many franchisors provide support for developing and implementing a marketing plan and/or integrating technology into the business (e.g., point of sale, operations tracking, intranet). The franchisor will help you ensure that everything is in place prior to opening.

New franchisee tasks: timing and sequence

Franchisors usually provide checklists and a timeline or schedule of the things you’ll need to accomplish for opening. For example, you might receive a list of items to be completed at least five weeks prior to opening and additional lists for each succeeding week. A progression of scheduled checklists will help you prioritize your “to do” list each week throughout the process.

As a general rule, these factors will determine the time it will take you to get your business up and running:

Real estate. If the franchise involves leasing a location, it will take six months to a year (or sometimes even longer) to get the business open. If the business requires a custom-built stand-alone location, plan on six months to two years for its completion.

Training. After you’re awarded a franchise, the franchisor will schedule your training date. Many franchises seek to train several franchisees at the same time. The training may take place at the corporate location and/or involve hands-on training at a franchise location. This is usually timed to ensure that training is fresh in your mind when you open your own business.

Financing. Financing can delay your opening for a period of six to eight weeks, or sometimes as long as six months, depending on the lender and type of loan.

How to ease any anxiety

If reading this list of items gives you a feeling of anxiety, that’s normal and expected. As with any new experience, the easiest way to alleviate anxiety or fear is to gather information. During your research, as well as during your training, make sure to ask the franchisor all of your questions. Speak with existing franchisees to get their perspective as well. That way, you’ll have realistic expectations, you’ll know exactly what needs to be done, and you’ll be likely to have a positive experience when opening your new business.

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