What is Return on Investment?

Savvy investors always make it a point to estimate the amount of money they expect to earn (return on investment) regardless of the type of investment they are making. In the case of franchising ventures, it is important to consider not only the monetary investment but the time spent in the business as well. Therefore, the return on investment should be greater than when contributing to a passive investment such as the stock market or real estate.

What is a Good Return on Investment in Franchising?

Returns of 10 to 15 percent are usually considered decent with regard to passive investments. However, since there is also a great deal of time involved in franchising in addition to the monetary investment, the return should be somewhat higher.

How to Determine the Potential Return on a Franchise

First of all, a more expensive franchise does not necessarily translate into higher returns. Returns will be driven in part by the management skills you bring to the business as well as the type of industry, the business model, and the market.

Studies show that higher returns are more likely to occur with investments of less than $200,000, and may even be quite possible starting the franchise with less than $50,000.

In order to discover the type of return to expect from a particular franchise, there is some preliminary investigating that should be done. For example, you should try to find out the average earnings of a typical unit over the initial three years of operation.

This information can be gathered by analyzing the franchise’s Franchise Disclosure Document (FDD ). In the document you should be able to find out what the initial investment is to purchase a unit. If disclosed, you may also be able to discover what the earnings have been by the various locations within the franchise organization. If this information is available, it would provide the data needed to project a three to five year return on investment estimate.

It is also important to review the portion of the FDD that lists current and prior franchise owners. Contacting these franchisees should provide you with valuable information on what you can expect to earn.

How to Increase your Potential Return

The main key to increasing your return is to find a good quality franchise in which you can make the best use of your particular skills as leverage. The combination of the franchisor’s business model along with your own investment of time and talents should be a good predictor of success.

Again, unlike a passive investment, in franchising the monetary contribution is not the only precursor for decent earnings. Therefore it is important to carefully select a franchise that matches well with your particular personality and experience.