Advisory Aug, 01 2011

Evaluate returns before investing

Quick RoI (return on investment) is the key driver for increasing number of entrepreneurs opting for franchising to start a business venture. Read on to know how far these entrepreneurs research to find out which brand offers best ROI.

By Abha Garyali
Sub Editor
Evaluate returns before investing

The motive behind entrepreneurs taking up a business venture is to get maximum profits in minimum amount of time. Passion or interest in any particular area does play a significant role in selecting a business but the main goal behind starting any business is to earn a lot of profits and money. This also stands true in case of franchising. Therefore before investing in any franchise, it is a must for the prospective franchisees to consider the potential return on investment (ROI). To understand the significance of selecting best ROI business, let us first understand what ROI means and how important it is in the franchise model.

Return on Investment (ROI) is a term used for gauging the profits out of investing in business or franchise. It includes the time margin between investment and profits earned through that investment.  ROI stands for the returns or profits that an entrepreneur starts receiving after investing money. In the franchising scenario it is of utmost importance because the future of the franchise depends on the profits earned after a time. Mostly franchisee has to pay royalty to the franchisor monthly. Paying a monthly amount without making any profits (ROI) may bring the franchisee to a halt in his entrepreneurial journey. Therefore judging the returns before investing is essential. Moreover, it is essential as the entrepreneur not only invests money but also invests a lot of time trying to make profits from the franchise. ROI can be of two types taking the factor of time into consideration.

Kinds of ROI

Return of investment may be in two forms, which are: passive and active. The former (passive ROI) is used in case of stock market or mutual funds. In passive, investors are sure of certain profit, after a particular amount of time from the investment they have made. Moreover, they do not have to indulge daily in these investments.  However, investing in a franchise is not passive investment. It requires active participation of investors.  Franchisees need to invest a lot of time and money in getting ROI on the franchise. Furthermore there is no guarantee on the amount of ROI they would be getting on their franchise. It differs from case to case. In such a situation the prospective franchisees themselves have to search for franchises with a high ROI.

Selecting a franchise with high ROI

It should be remembered by prospective franchisees that any business, either individual or franchised, may not have a great beginning. All businesses have their ups and downs in their growth. Initially, growth may be slow when clients and customers not being aware of the outlet. It is only at a later stage that a franchise becomes stabilised and start making profits. However franchisees need to have a fairly good knowledge about the ROI that they would be receiving by taking a particular franchise. For this some tips should be kept in mind:

Knowledge from franchisor: The first step for a wise aspirant is to talk and clear all doubts by talking to the franchisor.  Asking the franchisor when he started getting ROI in the business is a good idea. However do not just depend on him. Franchisors may misinform for expanding the business but a rough idea can be extracted by talking to them.

Meet existing franchisees: Acquiring information from the franchisor about other existing franchisees is a good idea. It is must to talk to them regarding when they started making profits in the franchise.

Do market research: Carrying a market research of your own locality (future market of the outlet) is necessary. It may happen that a particular market has a lot of scope for the product or service being launched. The case might be vice-versa also. Existing franchisees may get profits faster if the market has more potential, therefore market study is essential before investing money.

Competitors in market: The ROI can also be judged by the competitors of the brand in a particular market. If competition is more, growth of franchise may be slow and vice-versa.

Kind of product/service: Return on investment also depends on the kind of product or service outlet being opened. If it is a fad market, then ROI will be received at an early stage but then sales may go down later. However as mentioned above most franchises show slow beginning but give profits at later stage.

Managing personal talents: Investing in a franchise which attracts the aspirant is important. Buying a food franchise because it reaps higher ROI, when the entrepreneur is more interested in a beauty salon will not fetch good returns.

Word of caution

Most of the entrepreneurs believe that higher the investment, quicker would be the returns. This is a myth. A small investment can also lead to quicker and higher ROI, depending on the exclusivity and quality of the product/service. Therefore investing in an expensive franchise with the aim of higher and faster ROI is a bad idea.

To conclude it can be said that prospective franchisee should always invest after completing a thorough research on the franchise and being satisfied with findings. Nevertheless after investing it is essential to try to make the franchise a success. Starting small but dreaming big is the basic criteria.

Related: Plan Your Finances Right This New Year

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