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Opening a franchise with a fee and in build-out, selling a month with a royalty, a ad fund, cost of goods and a month in labor, rent and other costs, makes $7,800 a month and pays back the start-up cost in 4 years 4 months. Over years, with back when you sell, it returns 184%, or 24.4% a year. At hours a week of your own time, you earn $36 an hour.

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What is the ROI on a franchise?

A franchise sells you a proven brand and system, and takes a share of every sale for it. Enter the fee, build-out and expected sales above to see what's left for you. The example pays a $40,000 franchise fee and $360,000 for build-out and equipment, $400,000 in all. It sells $90,000 a month. After a 6% royalty, a 2% ad fund, 30% cost of goods and $48,000 a month in labor, rent and other costs, it keeps $7,800 a month and pays back in 4 years 4 months.

Royalties come off the top. The example's 8% for royalty and ad fund costs $7,200 a month, almost as much as the owner keeps. They're charged on sales, not profit, so you pay them even in a month you lose money. Cutting the royalty from 6% to 4% would lift profit to $9,600 a month. You can't usually negotiate it, but you can compare brands with the calculator before you sign.

Thin margins make sales volume critical. The example keeps 8.7% of sales and covers its costs at $77,419 a month. At $80,000 a month, it keeps only $1,600 and loses money over 10 years. At $100,000 a month, it keeps $14,000 and returns 50.6% a year. The franchise disclosure document often shows sales from existing units in Item 19. Use the low end, not the average, for your first try.

Count your time and the sale at the end. The example's owner works 50 hours a week, which is about $36 an hour. Over 10 years, with a $200,000 sale at the end, it returns 184%, or 24.4% a year. Hire a $6,000-a-month manager instead, and the same store keeps $1,800 a month and returns just 4% over 10 years. Many franchisees work in the business for that reason.

Frequently Asked Questions

How much does it cost to open a franchise?

The total, often called the initial investment, ranges from under $50,000 for some service franchises to $2 million or more for many restaurants. It includes the franchise fee, build-out, equipment, signs, opening inventory, training and working capital. Item 7 of the franchise disclosure document lists the range. Enter the high end as the start-up cost to be safe.

How much do franchise owners make a year?

It varies widely by brand, location and how hard the owner works. The example keeps $93,600 a year before taxes and loan payments, for 50 hours a week. Many owners earn a salary from the business plus what's left, so check whether a brand's reported profit already pays the owner.

What is a typical franchise royalty fee?

Many franchises charge 4% to 8% of gross sales, plus an ad fund of 1% to 4%. Some charge a flat monthly fee instead. In the example, the 6% royalty and 2% ad fund cost $86,400 a year on $1,080,000 in sales.

How long does it take for a franchise to be profitable?

Many franchises lose money for the first several months while sales build. After that, payback on the full investment often takes 3 to 7 years. The example pays back its $400,000 in 52 months. At $100,000 a month in sales, payback falls to 29 months.

What is a good ROI for a franchise?

Compare the yearly return with what you'd earn on the same cash in a lower-risk investment, and leave room for your time and the risk. The example returns 24.4% a year over 10 years, counting a $200,000 sale. Without that sale, it's 22.3% a year.

What is Item 19 in a franchise disclosure document?

Item 19 is the financial performance representation. It's where a franchisor may share sales or profit from existing units. Not every brand includes it. If one does, use the lower figures for your first run, and call several current owners to confirm their real costs.

Is it better to buy a franchise or start your own business?

A franchise gives you a known brand, training and suppliers, which can lower the risk of failing. Starting your own skips the fee and the royalties, so you keep more of each sale. Run both above. For your own business, set the fee, royalty and ad fund to 0% and add your own marketing to the monthly costs.

Can you run a franchise as an absentee owner?

Some brands allow it, but a manager's pay comes out of profit. In the example, a $6,000-a-month manager cuts profit from $7,800 to $1,800 a month, and the 10-year return falls from 184% to 4%. Absentee ownership works best when sales are well above the break-even point.

How do I calculate franchise break-even?

Divide the fixed monthly costs by the share of each sale left after royalty, ad fund and cost of goods. In the example, $48,000 divided by 62% is $77,419 of sales a month. Below that, the store loses money.

Can I get a loan to buy a franchise?

Many franchisees use SBA loans, equipment financing or a lender the franchisor works with. A loan lowers your cash up front but adds a payment. Enter only your cash as the start-up cost, and add the loan payment to the monthly costs, to see the return on your own money.

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