Comparing franchising versus other investments
Investments are rarely a simple decision. There is a lot to consider when taking on a franchise, not least the matter of investment.
I usually advise people considering this subject that the first thing to look at when deciding whether a franchise is right for you is to compare the returns that you might get from a franchise versus the returns that you might get from other investments, and indeed versus starting your own business. Weighing up these options will give you a far clearer picture to assist in making your decision.
Typically, most people look at two things when appraising an investment – investment yield, and capital growth. As a rule of thumb, in a franchise, I’d typically expect that a franchisee should be profitable from the second year of trading, although this, of course, will vary depending on the type of franchise and level of involvement of both the franchisee and the franchisor.
This is the return that you receive on a regular basis from your investment. This could be dividends from a shareholding or rent received on a property. In a business, this is the annual profits that the business makes.
Capital (Asset) Growth
In addition to investment yield, you would typically expect the value of your investment to increase in line with other similar assets. This might be an increase of the share price for a listed company, or an increase in property values for a rental property. For a business, this will be your resale value.
So, when deciding whether to invest in a franchise, you need to look at both the projected “investment yield” (the profit that the business will make), together with the “capital growth” – the eventual asset that you will have to sell when you decide to exit the franchise. Once you have an idea of the potential returns, both from a yield and asset perspective, you can then use these statistics to compare your potential venture against other types of investment, including starting a similar business outside of a franchise model.
When considering the profitability of a franchise, it is important that you consider what would be a reasonable salary for somebody doing the ‘job’ of a franchisee, and reducing the profit by this amount, so that you have an underlying profit figure for the business itself.
Any capital growth is crystallised at the point of exit of the franchise, ideally through a resale to a new franchisee. A franchise is valued in much the same way as any other business, although often there is a track record of franchise resales in mature networks, meaning that there are comparable businesses to help establish the resale value.
Although it might seem premature to be considering the exit value of your franchise before you have even chosen a franchisor; this is a sure way of ensuring that you choose the right network for your desired end goals, and also will ensure that every decision you make during the selection process, and indeed whilst running the franchise, will work towards what you want to achieve in the future