How to Evaluate a Franchise’s Return on Investment

Six ways to look at the ROI for owning a franchise.Owning a franchise gives you the ability to be in control of your life and schedule, as well as to chart your own career course. For some people, the flexibility offered by franchising and ability to have ownership of your own schedule could be priceless.

Even with those intangible benefits, Leslie Kuban, an Atlanta-based franchise specialist with FranNet, acknowledges that owning a franchise has to be a sensible financial decision.

So how do you evaluate a franchise’s return on investment (ROI)?

It is not prudent to evaluate the ROI of time and money of a franchise in comparison to having a corporate job or investing in the stock market or real estate, Kuban says. Owning a franchise is a different investment and type of career path, and it can be futile to compare them. Trying to find a standard statistical benchmark to determine the “good ROI” of a franchise  also can be futile, since it depends on how a particular franchise meets your particular needs, interests and skills.

Kuban identified six financial variables that franchisees should pay attention to:

  1. How much capital will it take to start and sustain the business until revenues are consistently covering monthly fixed and variable costs? And how long will it take to get there?
  2. To expand the business, what additional capital will be required and in what time intervals? By plowing x amount additional capital into the growth, what incremental return are you getting, in what time frame and is it worth it?
  3. If this business is your primary income source and your need to take out money to sustain your lifestyle, how does that impact your ability to grow the business? Your growth rate will be slower if you are “eating” out of the business versus plowing profits into further expansion.
  4. If you are borrowing money, how does debt service and interest payment impact how much working capital you need and how much longer will it take to reach a positive cash flow?
  5. How long will it take you to recoup your initial capital outlay?
  6. Assuming you have a well-run business with appropriate margins (for your particular type of business), at what multiple will you be able to sell the business down the road?

By digging into the answers to these questions, you can start to determine the ROI of a franchise you are considering.