The profits and returns you can expect from franchising
Thinking of investing in a franchise? Carl Reader, director, author and affiliate chairman of the bfa, offers an overview of what to consider...
Carl Reader is an authority on franchising. Head of franchising and director at Dennis & Turnbull Accounting and affiliate chairman of the British Franchise Association (bfa), Reader believes that, often, well-meaning advice on franchising can be detrimental to potential franchisees. With this in mind, Reader has recently authored The Franchise Handbook – a comprehensive guide for any aspiring franchise owner; covering exactly what franchises are looking for, what can and can't be negotiated with a franchisor, and how to ensure you win the franchise you want. In this extract from the book, Reader explains what you need to think about before investing in a franchise…
There are two ways that you can get a return on investment (ROI)– 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 varies 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.
Franchise ROI advice from a fellow franchise expert
Michael Bohan of Franchise Resales says:
“Franchising is not just about lining the pockets of the franchisor, although some franchisors do seem to think this. In fact it’s about building your own business with the help and support of the franchisor.
“Now when you are looking at buying into a franchise, it really doesn’t matter what brand or sector they are in – if you want to turn your business into a management business you can do. This is something that your franchisor will help you with. It really does depend on you, and, what I mean by that, is when you start releasing yourself from the day-to-day running of the business this is when the business has a sell-on value.
“If your business relies on you and you alone then to try to sell that on is very difficult: not impossible, but very difficult. The business has to be able to work as a business. Some people think that they have a business, when in fact they have a self-employed job. By this I mean that if they don’t go to work then they don’t earn any money.
“A true business, on the other hand, still makes money even if you are not there all of the time. This can be through online sales or by having staff working for you.
“Your franchise, at the end of the day, is a business under an umbrella. It can create its own value based on how you operate the business. I have seen many single-unit franchised businesses in my time in franchising that are worth a lot of money: yes the brand and sector can help, but it’s the franchisee running the business that makes it valuable.”
Have a desired end goal for your franchise
There is an underlying point here that is worth considering now, even though it probably couldn’t be further from your thoughts at the moment.
When entering into a franchise agreement, it is worth considering what your exit plan is. This can be determined by a number of things:
- Desired retirement plan
- Desired net worth
- Desired lifestyle choices
Although it might seem premature to be considering the exit value of your franchise before you have even chosen a franchisor, this is a surefire 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 while running the franchise, will work towards what you want to achieve in the future.
Calculating franchise ROI: In summary
You should always consider a franchise investment in the same way that you would consider any other investment, without letting emotion get in the way.
Buying a franchise allows you to tap into an existing brand which your potential customers may have heard of. Buying a franchise also gives you a ‘blueprint’, through the operations manual, of how to run the business successfully.
On the flip side a franchise has some restrictions, and you will not be free to run the business in the same way that you might be able to run an independent start-up. Every franchise is different and you will need to appraise the initial package, in particular the support and training, to ensure that you are happy with the investment.
It’s important to remember that a franchise should develop into a sale-able asset, so rather than just looking at the ongoing income you should also consider your exit strategy.