The secrets to finding out the ROI potential of a franchise
When investigating a franchise opportunity one of the most difficult pieces of information to get from the franchisor is how much money you might make. This may be frustrating because you are not going to invest in a business until you have a good idea of what you can earn. In most cases the franchisor is not being purposely difficult. The Federal Trade Commission (F.T.C.) and many states have stringent regulations as to how franchisors can provide this information to prospective franchisees. However, there are ways to get this essential information.
Why is the government regulating franchisors?
In 1979 Congress passed legislation authorizing the F.T.C. to regulate the franchise industry to protect the public from a franchisor making fraudulent earnings claims. A number of states also passed similar legislation. The current F.T.C. and state rules do not forbid a franchise company from supplying information about the earnings that can be achieved in their business. They do, however, regulate how this information can be given to a prospective franchisee.
A franchise that wants to provide earnings claims must put it in writing in their FDD (Franchise Disclosure Document). Also, it is essential for the franchisor to make sure that the data provided is accurate and not misleading and they need to clearly label any assumptions or qualifications on the data provided.
Assuming they meet the legal requirements, a franchisor is free to provide whatever earnings information they want to a prospective franchisee in terms of sales, expenses, cash flow and income.
Why don't all franchisors provide this information?
It sounds relatively simple but there are still many franchisors that don't provide earnings claims. There are two likely reasons: First, producing an earnings claim does involve effort and expense for the franchisor. Second, the results may not be attractive enough to assist in the recruiting of new franchisees.
Where else can you find this information?
If a franchise does not provide an earnings claim in their FDD, the best source of information to find out how much money you might make is the existing franchisees of the system. Call them and ask. Item 20 of the FDD provides a list of current and former franchisees along with their contact information. You will be talking to many franchisees anyway as part of your due diligence so make sure you also cover the subject of the averages and ranges for earnings in the system. By gathering actual performance statistics, you will have a realistic starting point in determining how much you can expect to make in a similar business.
What's a reasonable level of earnings for a franchise business?
Once you have earnings data, your next question will be whether the probable earnings represent a good return on your investment.
Remember that when you invest in a franchise, you are investing both your time/talent and your money. Therefore, you should reasonably expect a greater return than you would for a passive investment of money only.
If a good return for a passive investment is 10% to 15% per year, you will want to see a greater return in a franchise opportunity. After all, the time you put into your new business should yield you a return at least equal to the return on the money you invest, maybe not the first year but certainly down the road.
A second important point to consider is that a higher franchise investment does not necessarily mean a higher rate of return. While this seems contrary to common knowledge, there are plenty of low to mid-range investment franchises that provide great return on investments. Don't limit yourself only to high-investment franchises when seeking that business with a high ROI.
How much money you will make as a franchisee depends on many factors, from the structure of the franchise (e.g. retail versus service), to how long your franchise has been operational, to how well you understand and embrace the system, to your enthusiasm for the business and how it will help you realize your dream. But, with a little research, you can get enough information to decide if this opportunity makes financial sense for you.
Request a free consultation from FranChoice today. FranChoice is a national network of franchise consultants that provide free guidance and advice to qualified individuals in the United States searching for franchise opportunities that match their personal interests and financial qualifications.