How to determine if a franchise is a good investment.
Updated: Oct 29, 2019
Franchising has become a very popular option for many people wanting to cross over from employee to become a business owner. Let's face it there are thousands of opportunities to look at. Here is a simplified way to help with determining if a franchise is a good investment.
While researching a franchise, it is important to look into the 3 components that generate gross sales. It's important to understand this and during discovery ask how the franchise works to help you increase sales. Here are a couple of questions to ask during your validations calls with franchisee owners:
What was your gross sales/revenue for year 1, year 2, and now? (they may not want to answer this initially, but once they know you are serious, they usually do). And how long did it take you to become profitable?
How did the franchise support you in building sales for your business?
What are the key performance indicators (KPIs) of the business?
Make sure to get a clear picture of overall costs that you will incur to open the business. This is commonly found under Item 7 of the FDD. This can include:
Professional fees - Accounts, Bookkeeping, can Attorney cost
Office or Retail: Location rent, insurance, utilities landscaping, sinage, maintenance
Inventory, equipment, supplies
Employee: training, uniforms, salaries, insurance
Grand Opening costs
And any ongoing fees such as royalties and joint marketing
This is one of the advantages of choosing a franchised business is that you enter with your eyes wide open regarding startup and future costs.
Now that you have a better understanding of gross sales and cost, it is easier to determine what you can expect to pay yourself. You will want to work with your trusted advisor to figure out the structure of how you should do this. Entrepreneur magazine has a great article on this to help determine your owner compensation.
Do the math
Now it's time to determine if this is a good investment. Please note this is a simplified way to look at it, I always advise consulting with your Franchise Attorney or CPA professional before purchasing a franchise.
Take the AUV (average unit volume sales)/ Average price to start the franchise = ROI(Return on Investment)
ROI is what you should be expect to get back from your upfront investment. You should expect 1/4 of the investment back yearly. If the return is higher than this than, consider the risk level and amount of how many hours you will be putting in.
Remember don't assume, ask, ask and ask again if you don't understand the information you are receiving.
SSB Franchise Consulting offers one-stop shopping when you are searching for a business to call your own. We help you save time by working with you to learn your likes and dislikes and style of doing business then matching you with prospective Franchisors at no cost to you. To read more on if we're a good fit go to https://www.ssbconsulting.us/faq
Ready to get started? Schedule your free consultation today!