The return on investment of a franchiseThere are two ways that you can get a return from any investment – investment yield, and capital growth. In a franchise, I’d typically expect that a franchisee should be profitable from the second year of trading; although this will vary depending on the type of franchise and level of involvement of the franchisee.
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.
The above is an extract from The Franchising Handbook, which is due for release later this year. Follow this link to pre-order and be one of the first to read it!