Advisory Feb, 05 2014

The mathematics of calculating the right RoI

Are you eager to invest via franchise model? Have you calculated the return-on-investment (RoI) that you will be getting after your business kick starts? Read how important it is to analyse whether you are getting the right RoI or not. Put your thinking c

By Amanpreet Kaur, TFW Bureau
Chief Sub Editor
The mathematics of calculating the right RoI

Before you invest in a franchise, make sure you have done all your research well in advance so as to avoid any chaos at a later stage. So it’s important that you calculate RoI before cashing in on any business opportunity. For a franchisee, investing in a business is easy but taking it to new heights and achieving good returns in turn is equally imperative.

What is RoI?

So what exactly is return-on-investment? RoI is mainly the returns that the franchisee gets in return after investing the money in the business venture. In layman’s language, RoI or Return on Investment is the percentage of return made on specific amount of investment for a particular business which could be positive and negative both.

Before you invest, evaluate RoI first

Undoubtedly, everyone knows about the replicable model of franchising. Getting into a proven concept may be a cake walk for the franchisees or investors but taking a business to a new level and getting quick profits is not a recurrent phenomenon. So, how can one accomplish triumph in a franchise business? There are many factors that are considered to be best for franchise business but, one of the most important factors is return on investment. Therefore, the question that crops up in franchisee’s mind is about the reasonable rate of return on investment that he/she will be getting after sealing the franchise pact.

It is indeed significant to calculate the RoI before actually putting in your hard-earned money. It is advisable for franchisees to analyse the sector or industry they are planning to get into. This is pertinent because RoI varies from industry to industry.  Talking about calculating RoI before getting into franchise business, Nitish Bajaj, Vice President – Marketing, CEAT Limited, says: “RoI calculation is the basis of any investment evaluation. At CEAT, we follow a rigorous RoI based approach for testing effectiveness of campaigns and businesses, it is imperative to keep a constant check on the efficiency of our investments. We initiate RoI discussions on a regular basis with our franchisees and business decisions regarding schemes/activations are based on needs arising from there.” On giving instructions to prospective franchisees regarding calculating RoI, Alkesh Agarwal, CEO, Refeel, says: “Whether it be taking a franchise or getting into any other business one must have to see and work on ROI. You cannot just take call of getting in to something because you like it, to like it for longer you need an adequate return. Get me right, adequate return again varies from person to person if you assume an X percentage and you get X-something, you never like it. So evaluating that any particular model is in line with the expectation is the key and the mapping of the same is of utmost importance before jumping in to the business.” So, before you actually think of getting into business, one should go through every aspect whether the money he or she is putting in a proven concept is of real worth or not.

The acceptable rate of return on an investment will depend on the choice of industry in which the franchisee places his money. Agreeing to the fact, Snigdha Deb, Franchise Manager, b:blunt, informs: “Choice of industry definitely plays an important role for the franchisee. The choice of industry can be based on past experience of the investor or may be the area of his interest or also can be due to the prospective growth that the investor has analysed in that particular industry. As time and talent are major contributions for the investor, choice of industry that he/she has interest in becomes the key factor for them to keep their mind and soul both involved in the business and in turn helps in maximising the RoI.”

Whereas Suman Saha, Head – Franchise Operations, Meritnation.com, India's largest K12 education website, believes that investing in a franchise is a huge commitment. It should be done with a proper calculation and meticulous research of the respective product and market. There are a couple of investment areas that need to be examined before getting into the business. He informs: “Before investing in a business, it is also important to analyse the capital expenditure, operational expenditure and interest on capital investment. He feels that the franchisee must analyse as how quickly he gets the break-even point on a long term scenario and able to take out the initial investment or deploy it back. At the operational level, how fast the franchise can get to a position where the running expenses are equal to or less than the revenue generated by the business.” He also feels that the franchisee must calculate the RoI so as to maximise the feasibility of the business. One must keep a very close eye on the operating expenses and create a balance between the cost and creating market penetration. The franchisee must watch the competition in the market, ensuring quality of product and services (if any) and the value being created for the end user. Besides that, innovation and constant up-gradation of the product is the key to take the brand to new height. The cost of capital, the return, compared to conventional business and other investment options need to be examined carefully and a break-even analysis should be done.

Talking about the good RoI percentage, Ashish Dalal, Franchise Manager, Your Fitness Club (YFC), says: “A Good RoI will vary from every sector invariably proportional to the growth of that particular sector, anything which would show 30-40 per cent RoI would be considered as a good percentage through my perception.”  According to him, besides health beauty and wellness sector, food and beverage industry is spreading across like a wildfire at a remarkably rapid pace in India. He also feels: “A franchise is almost never a passive investment. Virtually all franchisors assume that the owner will be investing at least some of their time and talent in the business in addition to their money. So it is reasonable to assume that an investment in a franchise should provide a return for both the money and the time that is being invested in the business; hence the complication in the RoI calculations. This also means that we expect the return to be significantly higher for a franchise than for a passive investment. Otherwise what's the point of investing your time.” While, on her views about good RoI percentage, Snigdha feels: “Anything above passive investment returns which is 10-15 per cent on an average if invested in stocks etc. but largely depends on the choice of industry and format of franchising.”

Word of advice

It is always recommended to study and delve into every detail to find out which industry or business can fetch more profits in return. Sometimes, the high investment business ventures are able to fetch fewer returns.  So, one must understand that RoI varies from company to company and industry to industry. In determining which company to invest into, the franchisee must compare the industry, business segment, the investment that it is offering to the franchisees, key competitors in your vicinity, risks involved, how fast one reaches the break-even point and more importantly, the returns that one gets on invested capital. As per expert’s viewpoint, if you are zealous about starting your business through a franchisable concept then, a careful research should be conducted well in advance to know about the nuts and bolts of a franchise business first. Since every business category has different business models and returns on capital invested and cost of running the business mainly varies from location to location, industry to industry and besides that it also depends on type of clientele or end customer the franchisee is targeting and is based on franchisee’s capability as well. So before you actually think of getting into business of your choice, ensure to evaluate the returns that franchisor assures in the offing.

Related: How can entrepreneurs have direct Access(ories) to profits?

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