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Researching a Franchise

Calculating Franchising ROI

How to determine whether a franchise investment makes financial sense.

Jeff Elgin

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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.

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Researching a Franchise

Maximise Your Social Media Reach This Holiday Season

Quick and cost-effective, social media is your best tool to reach target markets when it matters most – during the holidays.

Diana Albertyn

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It’s not just the end of the year that can be lucrative for businesses. School holidays and other major breaks during the year present consumers with more time to spend shopping. Why not ensure money is spent at your franchise by capitalising on the minimal cost and maximum exposure of social media?

You don’t have to create entirely new deals or promotions from what you may already have running on your store, but find a way to make it special for your social media followers, suggests Kelly Mason, marketer at Customer Paradigm.

Holiday campaigns on Twitter, benefitting from popular hashtags, streaming live content, and receiving information instead of just distributing it via social media are just some of the ways to stay ahead of the competition.

Related: Why Your Business’ Social Media Marketing Strategy Is Probably Wrong

Know your customers well

The first step to attracting customers and getting them to complete a sale is understanding their customer journey.

“Being able to document where they spend their time online, which social channels they use most, and what they’re reading or watching on those channels is a huge plus. Finding that crucial information is fairly easy to do, thanks to modern-day marketing tools and resources,” advises Paul Herman, ‎VP: Product and Solutions Enablement Group, at Sprinklr, a unified customer experience management platform for enterprises.

The better you understand your customers, the easier it is to reach them through a campaign optimised for their interests.

Master social listening

You could be using social media all wrong in the run up to all your holiday campaigns. Perhaps it’s time you used this platform to listen to your customers?

“Through social listening, marketers can identify major trends and product keywords in their industries,” says Herman. “For instance, knowing those keywords can help marketers identify which social platforms are more popular for a target audience. With that information, they can make smarter decisions about where to spend their money and which products or services to promote on each platform.”

Related: 10 Laws Of Social Media Marketing

Use the information gathered to determine what customers like about your product, what they dislike about it, and how you can improve upon it so they can buy more of it. The more of this data you collect, the better and more effective your interactions with customers will be.

Try something new

50% of consumers look for a video of the product they want to buy before going to an ecommerce store to buy it, according to a 2016 Google survey. “Video can be an extremely effective way to get your customers to take action – in this case, to make a purchase with your store,” adds Mason.

Video adverts are often used as an experimental tool in social marketing and switching it up on platforms such as Facebook Live, Instagram Live, Instagram Stories, or Snapchat – depending on your brand’s activity and your audiences’ interests – can help attract customers during seasonal periods.

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Researching a Franchise

Selling Your First Franchise? Consider These Key Pointers

You’re ready to franchise your business, but who do you sell to and how? Your first few franchisees may be the hardest to acquire, but the process will be smoother if you get some basics right.

Diana Albertyn

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Business experience gained running your independent brand will come in handy, but looking for franchisees is a different ballgame. “We have to attract the right people in enough numbers to make the difference; and, the key to more leads is to have a multi-prong strategy to marketing,” says franchise strategist and expansion expert Lizette Pirtle.

Using media (social, or otherwise), trained experts in franchise sales, and keeping in mind that whoever you sell to will become an extension of your brand, are important considerations before selling your to first franchisee:

1. Use (all) media wisely

Website marketing, print advertising and social media are just some of the many different ways to attract potential owners to your franchise. But the most cost-effect of the three may be a ‘tweet’ or ‘post’ away, says former Director of Marketing at the International Franchise Association and owner of Burris Branding and Marketing, Jack Burris.

Related: To Buy Into A Franchise Or Purchase A Licence? 3 Factors To Consider

“Three out of four people using the Internet are either on Facebook or LinkedIn or Twitter or all of them. Take advantage of social media,” he says.

“There’s typically no cost to play in the space except for the time that you need to invest to build your brand with a social media presence.”

2. Seek out franchise coaches or brokers

While this is a more traditional method of making reliable franchise sales, it’s a great way to form lasting associations that will take you beyond your first few sales. “Using broker networks is a great way to supplement your own efforts. However, you must spend time developing relationships with these people if you want to get results,” advises Pirtle. “Don’t think that just listing your opportunity with them is sufficient.”

Franchise coaches and brokers have multiple options for potential franchisees, so to put yourself high on their list of consideration when prospects enquire, you have to form memorable relationships.

Related: 3 Factors To Focus On When Opening Your First Franchise

3. Always consider the bigger picture

Out of all the people your marketing efforts attract, always keep in mind that few will check all the boxes and compromising could cost you in the long run.

“The franchise relationship is a long-term one. If you’re going to be successful as a franchisor, you should start with the attitude that every franchisee will be someone who you’ll have to live with for years to come. And nowhere is this philosophy more important than when awarding your first franchise,” says Mark Siebert, CEO of the iFranchise Group, a franchise consulting organisation.

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Researching a Franchise

3 Factors To Focus On When Opening Your First Franchise

To become a successful franchisee, there’s lots more to learn. Take notes and this will be an adventure still with its challenges, but less stress.

Diana Albertyn

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Experts and those who’ve gone through the launching, managing and successful running of a franchise will tell you that owning a franchise can be just as risky as owning an independent small business – and it doesn’t get easier after signing on the dotted line. But that doesn’t mean it isn’t worth giving franchising a shot.

“The hardest part of being a franchisee is learning and adopting all the processes that exist in the brand you’re buying into. But it’s important that a customer can walk into any franchisee’s property across the country and have the exact same experience,” says Jeff Chew, Pizza Factory franchisee.

With that in mind, remember the financial, emotional and physical investment you’ve made in this new venture and let it fuel your success, from before you even serve your first customer

1. Financial and intellectual wealth

Don’t buy into a franchise where you might be undercapitalised, advises Paul Durant, a Junk King franchisee.

Related: Expansion Funding Options For Your Growing Business

Keep in mind that running a new business isn’t challenging only mentally strenuous, but financially too, because you’re not always immediately profitable. Ensure you have enough runway for a few years at a loss or minimal profit.

“I did not do a thorough job in my initial research and discovery calls. I used a lot of my own assumptions and luckily they were fairly close,” recalls Durant.

“I would, however, suggest that you ask very detailed questions during the discovery process and listen carefully to the responses. Often what is not said is equally as important as what is said.”

2. Remember the purpose of the manual

The point of buying into the concept you’ve chosen is to ensure success based on a roadmap that’s already been drawn out for you. Straying from this plan unnecessarily is a shortcut to failure. This doesn’t mean you cannot make changes, but always ensure your growth is where it needs to be by following the system completely.

Franchisee Mark Arduino thought he was taking the advice he’d been given countless times: Just follow the system. But he quickly realised he wasn’t when all the franchise-specific training he’d been through was forgotten in favour of easier shortcuts.

“Then I realised my mistake. I came to see that it’s very user friendly. I’m sorry I didn’t use it from the start!” he says.

Related: How To Choose The Right Finance For Your Business Or Property Portfolio Expansion

If you think you have a better way of doing something detailed in the franchisee manual, do your research. Your decision should follow a discussion with your franchisor, then align to the business plan.

3. Learn at every opportunity

It’s great that you have previous experience in business. It’s a huge bonus that could put you ahead of other franchisees in your network. But, always be willing to learn and put your hand up or open a book if you’re not sure. A vast business background doesn’t guarantee automatic success as a franchisee, so be open to learning from others.

“I have learned more from two of the franchisees in my area than I could ever have imagined and I owe my early success in large part to their willingness to help,” says Jeff Steele, a CMIT Solutions franchisee.

It may sometimes seem like you can do it all on your own, but even when you feel you can do anything, you cannot do everything. That’s why you joined a franchise that (hopefully) offers good support structure.

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