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What is ROI?
There are a number of technical definitions to describe the business term ROI, or “return on investment”.  For example, InvestorWords.com says, “A measure of a corporation’s profitability, equal to a fiscal year’s income divided by common stock and preferred stock equity, plus long-term debt.  But what does that mean to a prospective franchisee?  Not very much!

A Definition of Franchise ROI
In the simplest of terms, your return-on-investment is an analysis of the amount of money you pay to acquire a business compared to your expected or actual profit.  If you buy a business for $100 and show a net profit at the end of the first year of $20, then your annual ROI for that period is 20 percent.  In this scenario, and assuming a similar rate of return each subsequent year, it would take you five years to recoup your initial investment.

Buying a Franchise to Boost ROI
There are lots of reasons why people choose to buy a franchise.  One of the most logical, although rarely voiced, is that you can probably make more money running a business than by taking the total amount and parking it in the bank.  If a T-bill or CD (certificate of deposit) is paying three percent a year, using the same money to build a business will more than likely earn you many times that – plus it keeps you off the streets and may even give your lazy brother-in-law something to do on the weekends.  There is an even greater benefit to being a franchisee as opposed to a simple investor.  An investment vehicle will pay the same amount month after month, until the term expires or the bond matures.  By running your own business, you directly affect the return you can expect, and hard work plus support from a great parent company can seriously boost your payback.

Facts and Fallacies
One of the biggest mistakes people can make when assessing the value of a franchise is to assume that the more money you spend, the more you get in return.  While it is true that top-shelf brand names often require higher franchise fees and a greater cost of doing business – a McDonald’s restaurant will run you a lot more than some regional fast-food franchise – it is entirely possible to achieve significant ROI from a much smaller buy-in.  Don’t forget, it’s not only money that you invest when purchasing a franchise.  You are also putting in significant personal time and effort, both of which have value.  Your actual rate of return may also depend on the industry your business is in, the market where you’re located, and your individual skills at running an enterprise.

Tossing Around Some Numbers
Before the recent decline in interest rates, the general rule of thumb was that a passive investor – one with at least $100,000 to risk – should expect anywhere from a 10 to 15 percent annual return.  Nowadays, it’s just as likely for a similar investor to be happy with seven to nine percent.  But franchise owners are hardly passive investors – think about all those hours you will put in to make your business a success – so a better return is not only expected, it’s vital.  The average franchisee hopes to make a minimum six-figure income some day, although it may take a few years to reach that level.  Nonetheless, the average franchise can often expect to return 30 percent annually.  This means, if your initial investment was $70,000, it’s not unexpected to see a first-year ROI of $21,000 to $25,000.  While this may not sound like much, keep in mind that ROI is usually calculated on NET earnings.  This means, “after all expenses have been met.”  One would presume that, as an owner but also an employee, you are already paying yourself a living wage out of the company’s monthly revenues.  Many franchisees choose to take their ROI money from the first few years of operation and sink it back into the company – whether by upgrading equipment, hiring more staff to handle the increased business, or even setting the cash aside to open a second location.

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