A franchise, unlike stocks, bonds, real estate, or other passive investments, is an investment in which you have a significant impact on how it performs. It is an active investment, and most franchisors will require you to devote your full time to managing and operating your franchise business, with the exception of some multi-unit developments.

Individuals typically become franchisees for three reasons:

• They've decided that working for themselves is preferable to working for someone else;
• They want to replace or supplement their income;
• And they want to get a better return on their investment than they could elsewhere.

At the very least, you should aim to make money based on your time commitment and a higher return on investment than you would get elsewhere. It's important to keep in mind that the departure value of a franchise in a well-performing franchise system may be greater than the value of an independent insurance franchise business because the relationship with the franchisor's trademarks increases the value of the business being sold.

How to Look at a Franchise Investment

When you buy a franchise, you will most likely borrow the majority of the money you need from a bank or another lending institution. Many franchisees get loans from their banks that are guaranteed by the Small Business Administration (SBA), making it easier to get a loan.

To make it easier to secure your load, the SBA has created a Franchise Registry. Heretofore, a local assessor had to read and evaluate the franchisor's providing every time you applied for a loan and buy a franchise to make sure it met the SBA's independence requirements. Franchisees no longer have to go through the individual document review process because franchisors now submit their offering documents to the SBA ahead of time. The Franchise Registry does not guarantee that you will be approved for a loan because that depends on you and whether you meet the bank's lending criteria; it simply streamlines the process of obtaining the SBA loan guarantee.

When considering a loan or a franchise investment, it's critical to ensure that the company's cash flow can support your debt payments. As a result, many franchisors set a limit on how much money a franchisee can borrow when purchasing a franchise. To ensure that your business will be able to support your debt service, you must work with your auditor or another financial advisor to prepare forecasts for your business. Assuming it will, you should determine your return on investment based on the amount you have directly contributed rather than the total amount you have invested in the company.

Determining the Potential Return on a Franchise

A Financial Performance Representation is included in the disclosure document that you receive from franchisors (the Franchise Disclosure Document, or FDD) (FPR). In the FDD, the FPR is Item 19. (The FPR used to be known as an Earnings Claim before 2007.)

The FPR is the only item in the FDD that is optional; while not all franchisors offer one, the majority do now. The FPR is not a guarantee of how well your business will do because there are too many variables to consider, and most of what determines whether your business succeeds or fails is determined by how well you manage and operate your location. The FPR will typically provide you with performance data on existing franchised locations. Some are quite detailed, while others only provide you with statistics. Because once evaluating a For the for, it's essential to read and comprehend the notes that come with it to get a better idea of what information the franchisor is using - and what information may be missing.

Other useful information in the FDD includes an estimate of your initial investment (Item 7), your initial and ongoing fees to the franchisor (Items 5 and 6), and whether or not your franchisor earns any revenue from merchandise or equipment you buy for your business (Item 8).

Visitors have at least one or two sources of information to evaluate your return on the investment, in furthermore to the FDD. Product 20 provides a list of active and retired franchise owners. Franchisees can give you a wealth of information about their startup costs, financial performance, break-even points, and so on. On the Internet, you can find information about the company and its competitors.

It's easy to make a sensible forecast of how your brand will perform and the return on capital you can expect to achieve if you work with a knowledgeable accountant or another financial advisor.

How to Increase Your Potential Return

Nothing is ever guaranteed when it comes to investing in a franchise business. Remember that your market may be unique; real estate and labour costs may be higher or lower depending on how the franchisor's distribution system is set up; product costs may be higher or lower; and, if you're the next franchise in a market, you'll likely spend more on marketing to develop new customers than if your brand is already well-known.

Never assume you'll be a better franchisee than others, that your market will outperform others, or that your financial  erformance will outperform others. As well keep in mind that the franchisor's FPR could include mature franchises in their average values. Most franchisors won't even consider locations that have been open for less than a year, and you'll almost certainly have to go through a training period. The outcomes will not be the same as they would be in a mature environment.

There is a tendency to adjust the numbers to meet expectations or even obtain a bank loan on occasion. That tendency can be disastrous. Do your homework, make your assumptions, and then draught your strategy. To increase your bottom-line projection, don't justify increasing the top line or changing the cost of goods, labour, or other costs. Projections must be based on reliable data and sound business judgement in order to be useful.

Choosing a good franchisor and creating a proper financial projection are two excellent ways to get your franchise off the ground. Keep in mind, however, that the true determinant of success is you, and how well you manage and operate your franchise.