Investors consider many factors when deciding which franchise opportunity is right for them. The overarching question is, "Which franchises give the best return on investment?" According to Franchise.com, the return on investment (ROI) on franchise investments ranges from 25-50%. Thus, franchise opportunities are extremely attractive to those wanting to launch a new career as an entrepreneur.
Finding the franchise opportunities with the best returns is like a treasure hunt. Online lists of best franchises do not include the average ROI, and franchisors do not have ROI information available. Thus, it is up to prospective franchise owners to assess the ROI of opportunities they are considering.
Projecting the ROI of a franchise opportunity takes more than reviewing the Franchise Disclosure Document (FDD) and asking around. Investors need to put a dollar figure on the time they will invest in managing the business and the opportunity cost of not investing in something else.
How to Calculate the Best Return
Calculating which franchise opportunity offers the best return is much different than projecting the ROI of other investments. For example, when an investor buys a $100,000 bond, then earns a $12,000 dividend, they know their ROI was 12%. The formula is similar for stocks (though investors need to include capital gains taxes when figuring the ROI of their purchases).
While stocks and bonds are passive investments, owning a franchise is hands-on. Thus, the value of time invested in running a franchise adds up. Other expenses to consider in calculating the ROI include:
Initial Franchise Fees
The initial franchise fee is a one-time investment to cover the costs of activating the business. The initial franchise fee usually includes:
The right to use the brand, develop the location, and join the franchise system,
A broker’s commission (if applicable),
Legal documents for doing business,
Onboarding and training, and
Support until the franchisee is ready to run solo.
Fees generally range from $25,000 to $65,000, with popular franchises charging higher fees than smaller companies and startups. See details on a franchisor's initial fees and expenses in its Franchise Disclosure Document.
Royalties Paid to Franchisors
Many people think franchise fees are the biggest expense when buying a franchise. In fact, royalty payments are more than franchise fees. Franchisors require royalty payments for the right to use their branding and other forms of intellectual property. The royalty rate typically is between 4% and 12% of the business’s revenue. Most franchises doing more than $1 million in annual sales such as fast food restaurants have a low royalty rate revenue. When a franchise has lower revenue, the royalty rate is more. Over time, a franchisee with a royalty rate of 4.5% will pay considerably more to the franchisor than one with a 4% interest rate.
Whether launching a business in a shopping center or from the back of a truck, expenses add up. Make a list of rent, renovation costs, signage, an alarm system, a website, social media, and advertising. Estimate payroll over the near-term, as well. Some startup expenses are less than $5,000. Launch a Cruise Planners-American Express Travel business for $1,600. Investors opening a well-known fast food restaurant pay millions of dollars to launch the business.
Cost of Capital
If you invested the capital elsewhere how much money would you make? While you cannot compare this to net revenue to reach the ROI on a franchise opportunity, you need to think about it. The cost of capital also includes the value of the time you spend getting the business going and keeping it growing. You could be doing something else with your time and possibly making more money.
Ongoing Operating Expenses
If the franchisor has completed its FDD, refer to Item 19 for information on operating costs. If the form has not been completed, estimate costs such as labor, rent, inventory, and advertising. Accountants and lawyers often help investors decipher the FDD. Other franchise owners also are a useful resource for understanding the cost of the investment.
Projecting the Revenue of Top Franchise Opportunities
In a traditional ROI projection, a manager calculates the percentage of growth by comparing net revenue to expenses. Figuring out the ROI of a franchise opportunity needs more nuance. Look at the big picture when calculating the revenue for a franchise opportunity. Include projections on the following:
Annual Sales or Earnings. Franchisors must report the performance of its franchises, including annual sales or earnings, on the FDD, Item 19. Estimate gross revenue based on what the franchisor has reported and by talking with other franchisees.
Income. Franchise owners pay themselves a set salary. On top of that, they receive the net profit from the business every year. When their business comes out ahead by $20,000, it is theirs. Every year the business grows, the franchise owner’s portfolio expands.
For many, an investment in a franchise is more about freedom than money. Franchise owners are their own boss. They have a flexible schedule and no limits on their income. You cannot put a price tag on these things but do consider them when deciding which franchise is right for you.
Looking for a Franchise Opportunity with Low Start-Up Costs?
If buying a franchise from a major brand is out of reach, don’t give up on your dream of owning a business. Hundreds of franchise opportunities are out there including many with a buy-in cost of $10,000 or less. Low-cost franchises may not make as much money as the well-known ones, but they are a good starting point for folks with limited resources.
To learn more about the costs of investing in an Honest Abe Roofing franchise, visit: honestaberoofingfranchise.com. Our well-known name, superior service, and relatively low start-up cost make us a franchise opportunity worth exploring. We are expanding from 23 franchises in six states to 75 franchises in the Northeast, Southeast, and Midwest in the next 3 to 5 years. Contact a sales advisor today.