What Are We Measuring, and How?Measuring Franchisee Return on Investment (ROI) is a key part of determining if a business is feasible for franchising. There are several components to measuring a franchisee’s potential ROI, however, and several different ways to measure.
Measure Them Not YouFirst, to illustrate the importance of measuring franchisee ROI (vs your ROI when you started your business), lets imagine your business is manager ran and takes very little of your time. Lets assume your numbers look like this:
($100,000- $40,000(8%*$500,00)-$10,000(2%*$500,000)-3600 ($300*12)- $1000-$3000)
How To MeasureYou must also decide if your business should be looked at based on an investment ROI, or a cash-on-cash ROI. Again, allow me to illustrate. If our hypothetical franchisee above took a standard small business loan, and was able to finance the normal 70% of the investment (the SBA typically requires a franchisee to invest 30% of their own money, give or take), then theoretically they could get into this franchised business for $82,500 ($275,000*30%) out of their own pocket. If their $42,400 profit was after making a loan payment, then their ROI on a cash-on-cash basis would be ~50%. That is a much more palatable number! Stick with me for just a minute longer and I’ll show you where this becomes really important. Let’s start with a clean scenario. Imagine two franchisees, one takes a loan and one doesn’t, and the overall investment is $350,000. Assume the franchisee that does take a loan does so for 10 years @ 8%. Finally, lets give these franchisees $600,000 in top-line revenue with a 10% EBITA margin.
|Franchisee A||Franchisee B|
|Initial Investment||$105,000||Initial Investment||$350,000|
|EBITA Profit||$60,000||EBITA profit||$60,000|
|Debit Service||$35,000||Debit Service||$0|
|EBITA Profit after debit service||$25,000||EBITA Profit after debit service||$60,000|
|Cash-on-Cash ROI||24%||Cash-on-Cash ROI||17%|