By Paul Giggi
Five Key Questions to ask a Franchisor – Question #2
If you haven’t had a chance to see our video on this topic I would like to suggest you do so for our conversational piece on this important topic. For this blog we will focus on Questions #2 of our Key 5 questions to ask.
During your introductory discussions with the Franchisor we have shared that there are many questions to consider asking in your discovery phase to help you to determine if a particular concept and Franchisor is the right one for you to partner with in operating the business.
The second of our Big 5 Questions to Ask:
What is the ROI?
Once you have received some of the financial data that you should expect to pay as a part of your investment, which is the focus of question #1; your next questions should be about your expected Return On Investment, or ROI, from your investment in, and operation of, the concept in consideration.
The Return of Investment can be measured in both time to recover your initial investment as well as the amount of money you make above and beyond your initial investment.
I would typically first want to look and the ROI on the basis of time to recover my initial investment. As an example, if my initial investment is $1 Million and the business makes $100K per year, my ROI is 10 years; in other words it will take you 10 years to earn your initial invest back and this is not a desirable plan, particulary when you consider that you will more than likely be infusing additional monies into the business as you operate for items such as maintenance, updates, replacements, etc… Typically, you should try to recover your investment within the first 4 to 5 years which would then give you the out years (years 6 – 10) to make your true profit on your investment. Generally, with a franchise restaurant, you will be required to sign a 10-year term for each site you wish to open and this term will match the lease (should you choose this approach to occupancy) as well as the term of your lender should you use debt financing, so all of your forecasting for the return is based upon that term. Therefore, an investment of $1M in which you receive back $200,000 per year would be a solid investment as you would recover your investment in 5 years and then be earning a return of 20% on your initial financial investment.
The amount of profit you make above your initial investment is the monetary return on your investment. For example, if your initial investment is $1.0 Million and after you have recovered your initial investment you are making 100 K/year then your monetary return is 10%. Understand that the Franchisor can not share what your expectations of your ROI but can direct you to how you can acquire the necessary information that will allow you to accurately forecast your return.
Calculating your ROI will also help you determine when you may be best positioned to sell your restaurant should this be something you have as a strategy in your business.
When you look at a franchise restaurant you want to add to your initial investment all of the items if cost to get started so don’t forget your Franchise Fee and any other start-up costs such as legal charges. This can be an involved process so be sure to get sound advice on expectations and objectives.