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How long does it take to see a return of investment as a franchisee?

How long does franchise ROI take?
People often ask me how long it takes to return your investment on a franchise. When discussing franchise ROI, there are really several seperate questions. How long does it take to make a return of your investment, how long to make a return on your investment, and what is an acceptable ROI for a franchise model. Today, we are just looking at the first, but keep in mind all three of these are covered in the book How and Why to Franchise Your Business.

The amount of the investment
How you fund the business
The profitability of the business

Profitability
Lets look at the last one first, to set a baseline. A good rule of thumb for ROI potential in a franchise is a minimum of 20% + equitable salary after two full years in business. To remove variables, we are going to assume that you are investing in a manager-ran business, so you don’t get the equitable salary piece, so now we are just working with the 20% number. So lets use 20% of full investment in year three and beyond as your profitability.

Investment
Next, lets look at the investment. Franchises can range from literally less than $10,000 to in excess of $10,000,000, but the vast majority of franchises range in the $100K-$1mil range, all-in. All-in means all costs to purchase the franchise rights, start the business, and keep it running until it is profitable. To narrow that down even more I would say that around 50% or more of franchises are between $200K-$750K. Lets use a nice round $400K for your investment. Now, based on the answer to question 1 (this paragraph) and question 3 (the last paragraph) we know […]

The pros and cons of joining a franchise

We have tackled the subject of becoming a franchisor often. What does it take to become a franchisor, is your business right to franchise, are you the right person to be a franchisor; all of these have been addressed. But we don’t often talk here about joining a franchise as a franchisee.
Joining a franchise
We don’t talk nearly as much about the pros and cons of joining a franchise. However, the answer to a franchisee are similar. Like any business model or business decision, there are pros and cons. I am going to assume that you have already decided that you have what it takes to be a business owner in general, and now you are just considering if you want to go it alone or be a join a franchise. I’m a positive guy, so lets start with the pros!
The pros
Faster start-up
In a franchise system, the franchisor steps in to help you expedite the start-up phase by providing you with a plan of action. They help you crucial decisions such as site location, hiring new staff members and the initial marketing and advertising of the business.
Brand Recognition
One of the benefits of joining a franchise is the brand awareness and national advertising power, either present or future. In addition to managing national advertising campaigns, most franchisors help you develop an effective marketing plan and often provide advertising assets as well.
Risk Mitigation
Joining a franchise is largely about risk mitigation. Everything in business is risky. Small and large companies fail all the time, franchisees included. However, a franchise is, at least to some extent, a proven business model. Naturally the more successful franchised locations in various locations a franchisor has, the more their model can be considered […]

Why is it beneficial to have military veteran franchisees or vet employees?

What’s the deal with hiring or recruiting vets, anyway?
 

As business owners or franchisors, we often here about the advantage of hiring military veterans. The first thing that often comes to mind is taking care of those who agreed to, or actually did, put themselves in harm’s way to defend our country and way of life. Surely, however, there are many other ways to support veterans than to give them a job, right? Absolutely! I myself am a support of the Wounded Warrior Project, send care packages to deployed personnel, and occasionally pick up a tab in a bar or restaurant for a service member.

So we don’t have to give returning service people a job to show our appreciation. That then begs the question, should we be focusing on recruiting candidates with military experience to join our ranks, either as employees or business owners? In short, YES!

 

I myself am a peacetime vet (sorry for the blurry picture, that’s all I’ve got!). That means that I served my entire military commitment (U.S. Army, 13M, STEEL RAIN) in a time that this country was not at war (my time of service ended shortly before 9/11). When it comes to readiness for a position, there is some distinction between peacetime and wartime vets. The qualities I am about to explain to you that make veterans uniquely qualified apply to both peacetime and wartime service members, but in peacetime we were practicing, while in wartime what was once practiced was being executed on.

 

 
So what qualities do military veteran franchisees or employees bring to the table that you may not find as easily in other candidates?

Personal Accountability
I went in the military a little older than most, so I graduated AIT
(Advanced Individual Training, […]

How to fund a franchise

How to fund a franchise
We have helped close to 2000 people invest in franchises. We have worked with franchisors that required an all-in investment under $50K, and have done multi-unit, are development, and master franchise licenses with investments in excess of $5million. An individual’s available capital, the amount of total capital needed, as well as their other assets, credit, business experience, etc., will influence what funding types they have available. However, there are four many ways to fund a franchise; all cash, retirement funds, SBA-backed loans, and private investment.

Each of these can impact the ROI of your franchise. If you are considering becoming a franchisor, your franchise consultant can help guide you to setting up your offering to be most attractive to lenders. If you are a considering becoming a franchisee, these are several of the ways to fund a franchise that may be available to you.
Fund a franchise with all cash
This is obvious, but it deserves a place on the list. I have worked with many investors who have funded this way. The advantages of funding a franchise all cash is that the business is not laden with debt or burdened with servicing, and you are not beholden to shareholders or fighting with partners.

 
Fund a franchise with retirement funds
People often don’t realize that, for many qualifying businesses, you can use retirement funds to fund the business. You are not withdrawing the money, but rather just self-directing it, so you don’t pay the penalties that you would for early cash-out. One of the great advantages of this method is that, if your business is more profitable than you need to sustain it and your lifestyle, you can push issue the profits back to the […]

Understanding the Item Six

Item Six requires franchisees to disclose “recurring or occasional fees associated with operating a franchise” (section 436.5). This is any ongoing money you pay to the franchisor or an affiliate thereof. If you are considering buying a franchise, this is one of the most important items. Item 6 in an FDD may seem very straight-forward, but it requires significant study and investigation to fully understand how it may impact your business. Though the $200/month technology fee may seem like nothing compared to a $25,000 franchise fee, that tech fee can cost you basically the same ($24,000) over the course of a 10 year franchise agreement.

Some franchisors have a 4-5 line item Item 6, whereas others may take up 3 or 4 pages or more. It is imperative that you understand EVERY fee on Item 6, its likelihood of affecting you, and also make sure that it is in your business plan. Here are some things you should consider as you try to understand the Item Six of the FDD:

Royalty

The royalty is pretty basic, but you need to check in the remarks/notes section, the footnotes, and the agreement itself to see when/if it can change. For a business that does $500,000 a year, a change of just 1% can make a difference of $50,000 over a ten-year term, so understanding under what circumstances that this can change is very important.  This, in addition to franchise fees, is the primary way your franchisor is able to pay their bills and staff the corporate office.

National Marketing

Most franchisors either have a National Marketing fund or have one reserved in the agreement, whereby they can instate one, either when the brand reaches a certain strength or when they decide, […]