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How much income can a franchise make me?

How much can you stand to make from investing in a franchise? Franchise Norm Friend sets out financial expectations in the first of this three-part series
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This article is the first in a series of three that address many of the initial questions you may have about investing in a franchise. This time, we will address how to adjust your expectations of earnings when moving from salaried position to franchisee, financing options such as leasing vs purchasing, which assets franchisors will allow you to use to finance the business, and how to assess your return on investment.

One of the questions in the Request for Information & Consideration Form a franchisor will require to you to complete and submit as part of your application for a franchise is, “What is the minimum income you need during your first year in business?” Your response to this question is important for a couple of reasons.

First, if you are considering leaving a salaried position to go into business for yourself, you need to understand that you may not enjoy the same level of personal income as you previously enjoyed, especially during the first few years of starting your business. Additionally, you may lose other benefits such as a company vehicle or a group health benefits program. Consequently, you need to ensure that you have sufficient personal cash flow to cover all your expenses based on conservative financial projections of revenues and expenses. 

Second, a responsible franchisor will want to realign any unrealistic requirements of income you may have, as they don’t want to allow you to get into a position where you are unable to meet your financial obligations as this ultimately creates stress for franchisor and franchisee. A franchisor will also consider information you provide in the Personal Financial Statement section of your application, such as mortgage or rent payments, credit card debts, car payments, other living expenses, and whether your spouse is earning an income. Most franchisors will not allow both spouses to get directly involved in the business until such time as the business can support paying both of them. Franchisors may allow you to use your personal property as collateral for a loan, or liquidate securities to finance the business; however, they may not allow you to liquidate any part of your Registered Retirement Savings Plan.

Many franchise companies have established financing or leasing programs that can significantly reduce the initial level of capital that is required. If a financing program is available, it means that the franchisor has been essentially pre-approved by the financial institution and you only have to qualify based on your net worth, credit record, liquid capital and unencumbered capital. If the business is a mobile/service business you should be able to obtain a lease for the vehicle, wrap/decals and designated equipment.

Calculating return on investment

As you will be investing your time, energy and money in the business it is reasonable to assume that an investment in a franchise should provide a satisfactory return on your investment (ROI). There are several ways to determine ROI, but the most frequently used method is to simply divide net profit by total assets.

So, if your net profit is $50,000 and your total assets (or investment in the business) are $200,000, your ROI would be 25 per cent. In order to calculate your ROI, you need to pay yourself a “reasonable wage” otherwise it is not a true ROI. In this case, a reasonable wage is what you would have to pay someone to do the work you are doing, which is managing or supervising the business.

The financial performance of any particular franchise depends on numerous factors including location and the franchisee's motivation, and business and management skills. In my experience, most franchisees are looking to recover their investment in the first three years; however, if the business is perceived to be high risk, the required ROI will inevitably be higher. In addition, franchisees expect a higher ROI when investing in a franchise than if they were investing in an independent business.

Part two: Why franchisors are cautious, typical disclaimers, financial information provided by franchisor, value of templates, and alternative methods for researching financial performance.