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A good return?

Sarah Stowe

The average life of a franchisee in a franchise system is seven years, reports Ian Krawitz, head of intelligence at market research company 10Thousand Feet. And existing franchisees have a mixed view of whether or not they will get a good return on their investment.

So it is important to be clear about your financial goals before you purchase. “In calculating your potential return on investment, after you have drawn a salary what is the profit you will take from the business each year? Consider your exit strategy; if you sell your franchise business at the end of year seven what do you believe you could realistically recoup?” asks Krawitz.

Add the total of your estimated profits and the resale value of your business and divide it buy the amount you will pay to get started, he advises. Then weigh this up against the alternative opportunities out there.

“Consult your accountant for professional advice and remember to take into account interest costs of any borrowings to fund your investment, as well as depreciation and tax implications.

“Once in the system you will also want to understand how the franchisor will help you to maximise your return on investment.”

Krawitz suggests three key questions to ask:

1. Does the franchisor conduct training programs and seminars to franchisees on how to maximise future business value?

2. Franchises are unique in that a potential investor can see the operation of many franchised units, not just yours. This means their perception of your business will be affected for better or worse by the other franchisees in the network. Does the franchisor have strong systems in place to ensure brand integrity throughout the franchise network?

3. Does the franchisor communicate that brand integrity is critical when selling and that all franchisees are responsible for brand integrity and each other’s ultimate return on investment?