Calculating A Franchisee’s Return On Investment And Why It Matters To Franchisors
The main reason behind venturing into any business is the money. You cannot call the business successful until it starts paying for itself. The same is true for franchise business and the person who is starting a franchise has high hopes for it. The brand-image and the uniqueness of a product/service will attract a prospective franchisee, but until and unless he sees the return of investment from the project, he won’t be interested enough to buy it. So, to catch the attention of the potential franchisees, the first thing that a franchisor needs to calculate is the time it will take for a prospective franchisee to get back his investment amount.
To calculate this ROI rate, a franchisor must first asses how much will it cost to buy a franchise from him. He is supposed to calculate the real-estate cost, the equipment-leasing prices and other sundry costs including the fees to be paid to him. Then calculating how much profit can be made in a year with the same kind of infrastructure is important. Next you need to divide the profit along the lines of the investment and you have the ROI for that kind of location. You can project this amount as a probable ROI to your franchisees as earning claim in the UFOC. But remember, you have to give proof of actual earning along with it. Also, if you are in the business for long, you are required to give the list of all the franchise location that has gained the projected ROI. (The rule has slightly changed in the new FDD, click on the following link http://www.firstprizefranchise.com/major-changes-coming-in-the-new-franchise-disclosure-documents/ to get further details.)
Giving this ROI rate is very important, as it’s one of the main reasons for which people will be interested in your franchise business for sale offers. As this has to be backed up by solid documents, you cannot give extraordinary claims that many unscrupulous businesses sometimes give in order to lure unsuspecting candidates. It will also give you more credential in the eyes of people looking for starting a franchise business. Moreover, don’t forget that a good ROI is the ultimate reason behind choosing a franchise opportunity; so, try to keep it attractive, as long as it helps you to get a healthy return as a franchisor.