When you start looking into buying a franchise, it’s important to work out your ROI.
First you need to assess how much working capital you will need in advance of the business contributing. Then you calculate when you’re likely to break even.
It’s never straightforward BUT there is a process to go through for a ‘ballpark’ answer.
Different franchisees have different breakeven points which depend on a range of factors.
So, a franchise requiring significant investment upfront will take longer to pay back than a franchise with little initial investment.
A franchise with premises, high levels of stock or a significant equipment investment will take longer to pay back than one where you’re working from home.
A high-investment, high street, high-stock franchise may take two to three years to break even. Whereas a ‘work from home’ franchise can start making a contribution in two to three months.
Even within a single franchise, calculating the ROI or breakeven point can only be a rough science. There are too many variables impacting the business, not least the franchisees themselves! I’ve s seen two new franchisees in the same franchise operating with similar market sizes and demographics achieve totally different breakeven points.
Following the system
ROI often depends on a franchisee’s own level of activity, drive and ambition, individual skills, competence and, most importantly, willingness to follow the business system.
The franchisor has generally spent a lot of money and time developing, testing and honing their business system. They’ll have produced marketing tools, developed training programmes and initiated support systems. Franchisors say if you follow the system, market the business correctly and are ambitious, driven to succeed and prepared to work hard, then based on other like-minded franchisees you are likely to break even in a given period.
Do the maths
You need to determine what your own likely breakeven point will be and as a start I would suggest you work with your accountant and do your own financial modelling.
Take the financial parameters detailed by the franchisor as a starting point, but add your own assumptions about the marketplace, your potential penetration, the prices you think you can charge, the percentage of exected repeat purchases and how quickly you feel you can add new customers to your ‘pool’.
The franchisor will have their expectations in terms of turnover, gross profit, costs and net margins.
Use these figures as a guide but prepare three different scenarios yourself:positive, average and negative.
Start by mapping your expected performance – the one that most closely matches the franchisor’s model (after all, they have the experience) to give you a benchmark.
Then do a calculation on the conservative side with lower turnover and higher costs.
Aa a third option, do a more positive calculation with lower costs and better than expected turnover and margins – just to see what the figures will look like if you are as good as you think you might be!
Talk to other franchisees
Take your three options, speak to other franchisees in the network and get their input. Are you being realistic? Too negative? Too positive?
Then discuss with the franchisor how you arrived at the three options and get their input.
Between your efforts and input from other franchisees and the franchisor, you should arrive at a fairly accurate financial picture of the business and its likely ROI.
Franchising works best when three critical factors come together: a good and proven system that is well supported by the franchisor; enthusiastic and rigorous implementation by the franchisee and shared best practice across the franchise network. If you have all of this, and your calculations stack up, you should achieve ROI in good time.