When Buying a Franchise Calculate Your Return On Effort

When evaluating a franchise opportunity, the return on effort or ROE can be just as important as the return on investment or ROI. When individuals consider purchasing a franchise, an important part of the evaluation process is projecting the ROI or return on investment. Although the calculation of the ROI will be an estimate, it will at least provide a snapshot of what you could expect to earn on the money that you’re investing in the franchise. To view the ROI process you can view the calculator on the FranchiseKnowHow website.

In addition to the ROI there is another calculation that should be made. We’ll refer to it as the ROE or return on effort ( not return on equity). I define the ROE as the time, attention and personal cost that needs to made in a franchise in order for that franchise to be successful. Based upon the operation, some franchises require less time and effort than others. As a franchisee, this investment can’t be dismissed. Since there are franchise opportunities in virtually every segment of industry, there are a variety of franchises to choose from. When making a choice, the ROE can be every bit as important as the ROI. Imagine investing in a franchise and finding out that the amount of hours and attention needed to be successful is far greater than what you expected or were led to believe? If you’re not able to make the commitment, you face the risk of losing your franchise and the money you’ve invested!

Calculating Your ROE:

  • Begin with an honest appraisal of just how much time and effort you’re willing to devote to the franchise. In my experience I’ve observed a good number of franchisees underestimate the amount of hard work it takes to be successful. Be sure that you’re willing to pay the price.
  • What time and attention are you able to commit to the business? Based upon your personal situation and the requirements of the franchise operation can you meet the physical and time requirements the operation requires?
  • The type of franchise will dictate to a great extent the requirements needed to be successful. Operating a restaurant or convenience store franchise, that’s open seven days a week and twelve hours a day, requires a major committeemen both mentally and physically. Many of these concepts lend themselves to a family operation.
  • Does the franchise operation lend itself to a manager or is it fundamentally an owner operated franchise? An unwritten rule of franchising is that the lower the investment the more important the role of the franchisee will be in having a successful franchise.
  • Are there personal factors that can interfere with the effort required for a successful franchise? I once worked in a retail franchise concept, where a franchisee told me that the franchise was responsible for lots of divorces due to the nature of the business.
  • Speak with as many franchisees as possible, including a mix of franchisees with one to five years experience, to find out what they feel is the effort needed to be successful.
  • Finally and most importantly measure your ROE to your ROI. There are franchisees earning 50K per year which represents a poor return on their investment. Some others might be satisfied with that result. Some franchisees earn minimum wage after considering the number of hours they work. If you can earn the same amount working fewer hours for someone else without risking your money perhaps a franchise isn’t your best choice.

If you’re considering investing in a franchise don’t forget to identify your ROE. Although you might not calculate a true financial result the process can help you determine the real investment you’ll be making.

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Comments

Ed, Thanks for another

Ed, Thanks for another thoughtful article. An "ROE" calculation is pretty easy to overlook in a DD evaluation. Mike

Ed, Thanks for another

Ed, Thanks for another thoughtful article. An "ROE" calculation is pretty easy to overlook in a DD evaluation. Mike

Call it ROEff

Seems as if a lot of newbie Zees make this sort of mistake.

"I'll just hire a manager to run it" is related to the supposition that the New Zee only needs 2 weeks training to learn the industry.  Which is related to the supposition that ALL a New Zee has to do is "follow the proven system". Which is related to using the Zor's unofficial and supposedly unrelied upon revenue figures fior getting a loan and revenue projections because the newbie doesn't know any better. Etc., etc.