Does ‘Return on Investment’ still apply when buying a franchise?

780X660Px Does ‘ Return On Investment’ Still Apply When Buying A Franchise

Return on Investment (ROI) is the return you get on your investment.

This means, if you invest $100,000 and get a return of $10,000, you’ve made a 10% return on your investment. It’s a useful concept and allows investors to compare investment alternatives.

But does this concept also apply to franchising?

Yes, it can, but there are a couple of broad key issues to consider.

1. Does the ‘Return’ include wages to the owner?

In my view, no. The ROI calculation should be after a ‘normalised’ wage is factored in.

For instance, If I spend $160,000 on a franchise, and pay myself $60,000 but still make a profit of $16,000 that’s a 10% return on investment, excluding my drawings.

This at least allows a potential buyer the opportunity to compare the ROI against other businesses.

But a franchise gets a bit more complicated.

2. Term

A franchise agreement is for a limited time. It’s called the ‘Term’ of the agreement. When the Term is up, the franchise ends, it’s all over.

This is unlike a bank, where you can withdraw your money. Or shares, which you can sell. Or an independent business which you can run as long as you want.

Put simply, when evaluating a franchise, it means you need to get your investment back during the ‘Term’.

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