Connect with us

Researching a Franchise

Calculating Franchising ROI

How to determine whether a franchise investment makes financial sense.

Jeff Elgin

Published

on

Franchise_ROI

What is a reasonable rate of return on investment in a franchise opportunity? Though the question seems simple, it is still an important one, so let’s analyse the factors involved in getting an answer.

Usually, computing the return on an investment is a fairly straightforward and intuitive process. When you invest in the stock market, for example, you know exactly how much money you paid for the stock. Your return usually consists of a combination of dividends paid to you while you owned the stock plus any appreciation in the stock value when you sell it. If you pay R400 for a stock that pays you a R20 dividend and then you sell the stock in one year for R420, you made a R40 total profit, a10% return on your investment. If you buy a bond for R400 and it pays you an annual interest payment of R24, your return on investment is 6%.

Those types of investments are referred to as passive, which means that you are investing your money but not any significant amount of your time. With passive investments, the more risky the investment the higher average return you expect to make, and the more money you invest the higher your total investment earnings will usually be. Most people would agree that, over time, an average annual return of 5% to 12% on your passive investment rands is good, and anything higher than 12% is excellent.

Investing in a Franchise

But a franchise is almost never a passive investment. Virtually all franchises assume that the owner will be investing at least some of their time and talent in the business in addition to their money. So it is reasonable to assume that an investment in a franchise should provide a return for both the money and the time that is being invested in the business; hence the complication in the ROI calculations. This also means that we expect the return to be significantly higher for a franchise than for a passive investment. Otherwise what’s the point of investing your time?

Most new businesses go through a start-up phase where they lose money for a while, then break even and ultimately become profitable.

The curve of this initial growth phase is usually fairly sharp in the beginning, and then the business stabilises and begins experiencing a more normal growth rate as it matures. For an average business, this process takes about two to three years. For this reason, when we look at the monetary return for a franchise, we usually look at what our income expectations are based on the business being in its third year of operation.

Evaluating ROI

When evaluating a reasonable return in a franchise, begin by looking at the return on invested capital. Since starting any business is considered a relatively risky investment, you should be able to earn a very good return on your invested capital, let’s say in the neighbourhood of 15%. In other words, for every R100 000 of your capital you invest, you should expect to make at least R15 000 per year in return on the investment.

Calculating a reasonable return on your investment of time is more difficult because of the variables involved. Start by asking yourself what your time is worth in general terms. How much are you used to earning in exchange for your work hours? If you can fairly easily trade your time for R240 000 in yearly income, then you can assume that is a reasonable value for a full time investment of your work hours into a business. So at the very least, you’re going to be looking for a business that can provide you with some increase in this standard return for the value of your time.

The analysis gets a bit more complicated, though, when you factor in lifestyle changes that can come with owning your own business. For example, let’s say that the business will provide you with a great deal of schedule flexibility or that it does not require any out-of-town travel. That may mean that you’ll never again miss a child’s birthday party or that you’ll finally be able to coach a soccer team like you’ve always wanted. As another example, let’s say that the
R240 000 job you currently have involves doing tasks every day that you really dislike, or that you’ve got a boss you can’t stand working for. Getting away from those factors and into a situation where they don’t apply may have a great deal of non-monetary value to you. These types of ‘soft’ factors are undoubtedly important to consider, but they are difficult to quantify with a fixed monetary value that we can use to compute a return on investment.

Working the Numbers

Let’s say that you are evaluating an investment in a franchise opportunity. Based on your research, you determine that the total monetary investment in the franchise is going to be R800 000. You further determine that the average income (before any owner compensation) produced by this type of franchise in the third year is R600 000. From the expected income of R600 000, you subtract R240 000, which represents the fair market compensation for your time. This leaves you with R360 000 as a return on the investment of both your money and your time. You would expect to earn at least R120 000 per year as a fair return on the R800 000 of invested capital, so the franchise in this example provides an additional R240 000 as a return on your invested time. That equates to a 100% return on the investment of your time. Even if there are no soft benefits to you whatsoever, this sounds like a pretty good deal.

If, on the other hand, the typical third year gross income is only R360 000 instead of R600 000, you would clear the same return on the capital you invested but the ROI on your time investment would be zero. With an ROI like that, the obvious question is why take the risk? Unless there are compelling soft benefits for you, it would be better to keep looking for a different business with higher returns while you stay in your current job.

As a final note, look for opportunities that grow to mature profitable levels much faster than the standard of three years. There are a few companies that reach this level within a few months and those businesses are much safer opportunities in a recessionary economy like we have been experiencing for the past couple of years. It may take extra effort to find them, but the time will be well spent.

Jeff Elgin has developed a consulting system that matches pre-screened, high-quality prospective franchisees with the franchise opportunities that best fit their personal profile.

Continue Reading
Advertisement
Click to comment

You must be logged in to post a comment Login

Leave a Reply

Company Posts

How To Become A Hi-Q Franchisee

Are you looking at investing in a tyre replacement and service industry? Look no further than the Hi-Q franchise.

HI-Q

Published

on

By

grosvenor-crossing-hiq

Established in 1999, Hi-Q is a successful and diverse multi-product, multi-brand leader in the tyre replacement and service industry with a network of over 130 franchisees nationwide.

the-one-you-can-trust-visual-2

With the support of international tyre giant Goodyear, Hi-Q has established a solid reputation of ‘the one you can trust’, and the Hi-Q approach and philosophy is embedded in this.  We have the trust of our customers, our network and our suppliers – that’s why you can trust us to take you and your business to the next level.

When you’re working with people’s safety, trust forms the most significant part of the equation

Hi-Q introduced the original and innovative TyreSurance initiative – the only aftermarket tyre damage guarantee product that backs the consumer no matter the brand of tyre.

tyresurance-visual

Related: We Want To Invite You To Join Us On The Hi-Q Journey And Become A Franchisee

Each Hi-Q Franchise offers a broad range of brands within the different product and service categories that customers know they can trust, and at prices they can afford. Product and services include tyres, exhausts, shocks, batteries or brakes, wheel alignment or balancing, and a 10-point safety check.

hiq-franchise-tyres

hi-q-interior-store-visual-4

We have identified areas of opportunity to extend our Franchise footprint growth.

If you are looking to join a new franchise and you share in our values and vision, we would like to hear from you.

For further information on how to become a franchisee, call us on +27 11 394 3150

Continue Reading

Researching a Franchise

Col’Cacchio – Benefits Of The Franchise Model

Six key benefits of the restaurant franchise model – and what to look out for when considering a franchise.

Russell Otty

Published

on

benefits-of-the-franchise-model

For investors looking to the restaurant industry and considering a franchise knowing it has a proven track record and is therefore possibly a lower risk, there are a few key things to be aware of about the benefits of the franchise model, which if investigated, can also point to a franchise that is not for you.

Russell Otty, Chief Operating Officer of the Col’Cacchio Group, shares some of these key benefits and indicators of whether a franchise is for you:

1. Making the cut as a franchisee gives you the confidence that you are making the right decision

You may think psychometric testing, three days in a restaurant following a franchisee around, and a panel interview with the senior management of the franchisor, is a bit over the top, but the franchisor that puts you through your paces and assesses your ability and commitment to running the business, is doing you a huge favour and may even help you see this is not for you. It goes both ways, and after an intense courtship, you should know if you want to try a long-term relationship.

Related: Col’ Cacchio: A Passion For Pizza

2. Assistance with location selection and negotiation of the terms of your lease

One thing you can do to limit your risk is to not open a restaurant in the first place if your rent is not going to be reasonable or you simply won’t get customers through the door. The franchisor will vet and approve the site – they will have extensive insight into what has worked or not worked location-wise for their brand, and can assist you to weigh up the area and it’s potential to attract customers.

The commercial terms of a lease is very important – you can’t be too ambitious about turnover targets, and having the backing of a franchisor can be beneficial if a landlord becomes unreasonable.

3. Staff training and development tools on hand

Consistency is important with restaurant franchises, as a customer visiting a brand anywhere in the country, goes there knowing exactly what they are going to get. This is best achieved with solid training, perhaps access to resources such as training videos, and regular visits from franchise managers.

You should check with your franchisor what level of training and franchise support you will have on an ongoing basis. Ask about the ratio of field trainers and operations managers to the number of franchisees in the group. You want the franchisor in your restaurant in some shape or form, two or three times a month, whether it be the training manager, the regional franchise manager or the national operations manager.

4. Access to supplier networks to manage your input costs

Negotiating basket pricing with distributors regionally and nationally, the franchisor will leverage their buying power on your behalf. They should assist to manage your suppliers and make sure deliveries happen on time, and ensure that product quality remains consistent. They can also negotiate to ensure your input costs do not increase before the next menu launch – so you can ensure your margins remain intact.

5. Brand loyalty and locality marketing

When you buy a restaurant franchise, you gain a group of customers who know who you are, the food you serve and the way you make them feel. The money you will pay towards marketing each month gives you insight into the broader restaurant market, the experience of what is working across a number of sites, and how best to keep the attention of new and existing customers.

Some franchisors offer locality marketing assistance – your site and area has specific needs that other outlets may not have, or there may be events in the area that can be leveraged to run special offers. Ask if the franchisor offers this as a service, as it can assist you greatly to have an advantage over other restaurants in your area.

Related: Beginners Guide To Digital Marketing In South Africa

6. Business development insights

The franchisor has access to insights gained across the group, and the systems that they have in place to track costs and increase profit margins, can be of huge assistance. If you are looking for business support, a franchise manager can be the one sitting with you telling you that you spent R2 000 too much on cleaning this month or saying you need to wait till next month to make that purchase. The level of business support you will have access to, is an important factor to consider, depending on the level of support you may require.

Recipe for success

Nine times out of ten, a restaurant franchise that fails, fails because the franchisee loses interest or lacks the commitment to make it work. Selecting the best franchise for you as the investor, or as a restaurant entrepreneur, is the most important first step you can take towards success, so do the homework.

Don’t assume that because you are buying into a successful brand that it will be a success – business is not an exact science – you need to do your own due diligence and take responsibility for your business, because it is after all your own investment.

Continue Reading

Company Posts

We Want To Invite You To Join Us On The Hi-Q Journey And Become A Franchisee

As the leader in the tyre replacement and service industry, we are invested in providing our network with the tools needed to thrive and grow in an ever-challenging market.

HI-Q

Published

on

By

entreprenerur-franchise-digi-ad-header

Vital Stats

This is an invitation to all innovative entrepreneurs who are seeking new and exciting opportunities – here’s your chance to become part of a winning team.

As the leader in the tyre replacement and service industry, we are invested in providing our network with the tools needed to thrive and grow in an ever-challenging market.

The Hi-Q Way

  • Hi-Q’s been voted the 1 tyre retailer by South African consumers in the Ask Africa Icon Brands Survey from 2010 – 2017.
  • Over the years Hi-Q has established itself as ‘the one you can trust’, with customers, the network and suppliers.
  • Hi-Q prides itself on first-class service, a multi-product/multi-brand offering as well as ground-breaking product innovations such as TyreSurance on all tyre brands.
  • Hi-Q has an extensive network of over 130 franchisees
  • Hi-Q has the support of the Goodyear value proposition.

If you are looking to join a new franchise and you share Hi-Q’s values and vision, please get in touch.

visual-2-hi-q

Continue Reading
Advertisement

SPOTLIGHT

Advertisement

Recent Posts

Follow Us

Entrepreneur-Newsletters
*
We respect your privacy. 
* indicates required.
Advertisement

Trending