When a future business owner is considering opening a franchise, two of the most common financial concerns that arise are:
- How much is it going to cost to start this franchise?
- How much am I going to get back on my investment?
These two questions on franchise finances are what’s known as return on investment (ROI). Return on investment is a measure of a franchise’s performance and an important consideration for any franchise opportunity.
Calculating and Evaluating ROI With a Franchise
When determining a franchise ROI, the formula isn’t as straightforward as simply dividing the money earned by the amount invested and multiplying by 100. Factors like revenue streams need to be included to determine how much a franchise takes in.
As a rule of thumb, franchising advisors suggest that after the second full year of business, a franchise should have an ROI of about 15%-20%. However, some franchises have a much higher ROI, like consulting. For example, if you were to start an ERA franchise, ERA consultants may sign a new client each quarter, with an average of five projects each. At $33,000 per project, an ERA consultant may earn about $165,000 per client. This means four clients in one year may result in about $660,000 in revenue. ERA consultants invest about $90,000 in their franchise in the first year, which means with four clients, each with five projects, the consultant has an ROI of 266.7% in their first year alone.
The ROI for a franchise opportunity will vary amongst various business models. Some will provide a return sooner, but others will provide a greater return later. You should also consider business costs and the time and effort required. In addition, there is a different ROI when you sell your franchise and have paid off your initial investment fees. Looking long-term is an important aspect of evaluating a financial ROI.
ROIs by Industry
ROIs can vary greatly between industries. Here’s a look at the industries that had the best-performing ROI as of the fourth quarter of 2022:
- Technology (28.43%)
- Capital goods (17.74%)
- Basic materials (16.98%)
- Energy (15.67%
- Services (15.65%)
- Consumer non-cyclical (9.76%)
- Consumer discretionary (8.22%)
- Conglomerates (6.96%)
- Healthcare (5.86%)
- Retail (5.26%)
When you explore a franchise in any industry, like those listed above, a good indicator of what to expect from the franchise ROI is to review the franchise disclosure document (FDD). The FDD may indicate the gross revenues of various franchisees, and while their expenses may not be identical to yours, it can give you an idea of what you might be able to expect.
Getting Good Information to Support Your Investment
As a franchisee, you naturally want to get the best franchise ROI you can for the time, effort, and money you are prepared to invest. To get the most from your choice of a franchise, make sure to research the best franchise to match your skills and experience. If you can operate the franchise more easily because you have transferrable skills to your benefit, your intrinsic ROI will be higher. Other things you can do to help get the most information about a franchise investment include:
- Talk to both the franchisor and other franchisees to get their perspectives.
- Evaluate your financing options and the capital you have on hand to determine your debt expenses.
- Look into the market trends for the industry in which you’re interested in opening a franchise.
- Prepare a financial outlook of what kind of return you might be looking to secure that will justify your decision to leave a salaried position.
- Use key performance indicators to evaluate the franchises you’re considering.
Find Your Best Savings with Expense Reduction Analysts (ERA)
Expense Reduction Analysts is a business consulting franchise specializing in helping business owners optimize costs and find innovative ways to increase profits. When you can lower the expenses in your business, you can increase your return on investment, an important factor in the financial longevity and eventual sale of your franchise.
We have a team of analysts from around the globe who collaborate on innovative ways to find savings in regular expenses and business operations. We work with you to implement the expense reduction options you choose to streamline your franchise. We can answer your business questions in franchising such as what are franchise fees, and how can you earn value through cost management.
Contact us today to request information on how ERA can help your business increase a return on investment.