Purchasing a franchise appeals to many investors. You’re getting the name recognition that comes with the brand. This saves you the trouble of having to generate interest in a completely new company and coming up with your brand identity. The customer base is already in place.
You must think about things like online payment processing, franchise owners, not to mention finding a suitable location for your brick-and-mortar store location. However, before you even start getting into all of that, you probably want to know the answer to a fundamental question: what kind of ROI can you expect from your franchise?
We’ll take a moment to talk about that right now.
What Does ROI Mean?
To start with, let’s define ROI. It’s a core business concept, so you need to have a handle on it if you’re going to be the owner of a franchise location.
ROI means return on your investment. To put it as simply as possible, your ROI is the amount of money you get back that the business brings in after expenses.
Since you’re probably going to live on your ROI, assuming you don’t have multiple revenue streams, you want it to be as high as possible. How can you know how much return on your investment you’re likely to get, though?
How Much Are You Looking for, Ideally?
For the most part, you’re looking to get an ROI of 15%-20% per year on your investment. Some investors who buy a franchise are looking for more like 30%-50%, though.
While that second set of numbers might be realistic in some instances, it’s not in many others. It’s virtually impossible to pin down the exact ROI you can expect to get back, though. There are simply too many factors at play.
What Factors Will Impact Your ROI?
If you buy into a franchise-based business setup, your ROI can be affected by how the economy is doing. If it’s shaky, that can impact some kinds of companies more than others.
For instance, if you make something that consumers deem essential, you’re not as likely to feel the impact from a weak economy. If you’re selling a luxury item in a weak economy, expect your ROI to go down.
Your operating costs will matter as well. If you have lower operating costs, it makes sense that your ROI will be higher.
The amount you must pay the franchisor in fees and royalties also matters. If these are higher, you will not get as much return on your investment.
The physical location you chose might also come into play. If you elected to put your brick-and-mortar store location at a spot where it’s getting a lot of attention, expect a higher ROI. If you miscalculated what car or foot traffic you might get, that can prove disastrous.
It might be unsatisfactory to say that your ROI is going to vary dramatically, but with these potential factors weighing in, the money you get out of your franchise could fluctuate wildly.
Also published on Medium.
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