How to Calculate a Return on Investment

To determine if the resale franchise you buy will be a good investment, you need to calculate your return on investment, or ROI. ROI is a percentage that represents how much of the original investment in the business comes back to you after a set amount of time, usually one fiscal year. Basically, you take the cost of the franchise resale and divide by the projected net income for the first year of business, and then multiply by 100 to make it a percentage.

As an equation it would look like this:
(Projected Net Income / Franchise Purchase Price) * 100 = ROI

If you financed the resale franchise purchase with a loan, you will also have to factor in any loan payments you made which increase your equity. This makes the calculation a little more complicated. You then take the net income projection, subtract loan payments, add your equity, and divide by the total cost of purchasing the franchise.

As an equation it would look like this:
(Projected Net Income – Loan Payments + Equity / Franchise Purchase Price) * 100 = ROI

What is a Good ROI?

The answer to this question depends on the industry that your business operates in. Every industry has its own standards for what healthy profits are. At this point, you’re going to have to do a little research.

Look at franchises in your industry and determine what the average net income is for companies over the last three or four years. Next, find out what the best performing franchise unit is in your company and look at what they are making. This will give you an idea of what is possible. You can find this information by requesting to see the franchisee’s Franchise Disclosure Document (FDD) and looking up the figures under item 19. The FDD will also have average net income projections making the search for this information easy.

With these numbers, you can perform the above calculations to find out what the average and what the best ROI for your industry might be.

Compare to Passive Investment ROI

Another thing to consider is how much of an ROI you would receive if you put your money in passive investments like stocks. A franchise is an active investment because of all the time and hard work it takes to earn with a business. Your time is valuable, so it must also be considered in determining if the ROI your resale franchise will provide will be worth it.

To calculate ROI from passive investments consider your normal income from working a regular job, subtract it from your projected franchise income, and divide by the franchise purchase price.

As an equation, it would look like this:
(Projected Franchise Income - Normal Annual Income / Franchise Purchase Price) * 100 = ROI

If the result is higher than 15 per cent, the resale franchise will be good investment because it is very rare to make an ROI higher than that with passive investments.