Which Franchise Should You Buy To Get the Best ROI?

When choosing a franchise concept, prospects tend to ask one question first: what is my potential ROI (return on investment)? With thousands of different concepts out there, each with different levels of profitability, calculating the ROI of a franchise is complicated. Here are some of the basic points to consider:

• Potential earnings: Within the brand’s FDD (franchise disclosure document), Item 19 offers performance information on existing franchised locations. The Item 19 is not a guarantee of how well the business will do, and franchisors are not required to provide one, but when available it offers statistical information that can help determine ROI. 
• Initial investment: The FDD also provides an approximation of the initial investment (Item 7). The upfront costs obviously play a major role in the potential for ROI, and should be weighed carefully against a prospect’s available capital and potential financing. For those looking for low cost opportunities, mobile or home-based concepts tend to have a much lower initial investment as there are no construction or rent costs.
• Franchisee and royalty fees: Most franchise concepts require initial and continuing fees paid to the franchisor, which can be found in Items 5 and 6 of the FDD. These fees will also have an impact on the potential ROI.

Dozens of variables combine to determine a franchise’s ROI, and many depend on the individual prospective owner/operator. To understand these factors, enlist the help of a knowledgeable franchise consultant, accountant or another financial advisor. These experts will evaluate the prospect’s specific situation and create a reasonable projection that details the return on investment the owner can expect to achieve.