Many entrepreneurs consider franchising, and there are all kinds of franchises available for investment. Franchisees are granted a franchise to operate their business in a specific region using the franchise company’s trademark and business model. When asked whether an individual franchising project is worth investing in, my answer is that franchising has many advantages, and there are also many considerations. The first step for entrepreneurs is to clarify the cooperative relationship between the franchise company and the franchisees, as well as the amount of investment, and the calculations of potential returns.

The operating mode of the franchise project is relatively mature, which reduces the entrepreneurial risk and investment amount. For entrepreneurs who lack of capital and experience, they can gain experience and increase income via franchising.

Franchise retail stores are funded by franchisees and have independent property and legal status. The franchise company and franchisees define rights and obligations through the franchise contract. Franchisees can enjoy discounts when purchasing goods through the franchise company, and the franchise company will provide guidance on technicals and marketing management.

Generally speaking, the fees that franchisees need to pay include:

1. The franchise fee is a fixed amount, and the franchise contract period is generally 2-3 years
2. Management and training fees, the franchise company usually waive this fee
3. Profit sharing, a certain percentage of franchisee’s income needs to be shared with the franchise company, and there is a minimum monthly profit sharing amount

Franchising uses the market appeal and management skill of the franchise company to carry out marketing activities, which can improve the success rate of franchisees. However, disputes are prone to occur between the franchise companies and franchisees. The fact is the violations of other franchise stores will reduce service quality, and damage the goodwill and interests of the franchise companies. Here are potential conflicts or pitfalls I’ve noticed:

• The furnish and mechanical configuration are decided by the franchise company, which may be too expensive and exceed the budget of the entrepreneur
• Materials and ingredients are also determined by the franchise company, and may exceed the budget
• Staff quality varies
• Staff training is not up to standard
• Too many franchise stores in the same area (e.g. 7-11)
• Insufficient brand promotion of the franchise company
• Product pricing is determined by the franchise company, and franchisees have no room for price reduction and promotion

In addition, entrepreneurs can consider the following indicators to calculate the potential returns on whether individual franchise projects are worth investing in:

Payback period: the time it takes to recover the funds invested in.

Payback period = total cost invested before opening / monthly net profit

Net profit: high turnover does not mean that it can make a profit, and a high profit project is worth investing in.

Profit = Turnover – Cost – Expenses – Taxes

Break-even point: That is, how much turnover must be achieved in order to not lose money. The break-even point is an operating indicator for restaurants and retail and can be calculated on a monthly or daily basis. Franchising, on the other hand, has to take profit sharing into account.

Break-Even Point = All Costs (Including Rent, Salaries, and Other Miscellaneous) / Gross Margin

Return on Investment (ROI): Return on investment is distinguished from profit and gives investors a better idea of the efficiency of a potential investment. A positive ROI means that there is an opportunity to make a profit, and it is a project worthy of consideration.

ROI = (Net Income from Investment / Investment Cost) x 100%

Summary

Different franchise models have different funding requirements and partnership relationships. Entrepreneurs need to carefully study the market prospects before making a decision, whether the required investment funds and cooperation models are reasonable, and compare the investment returns of multiple projects.

Currently, most franchising projects available are mainly catering, education and retail. Entrepreneurs should also consider whether they are interested in those industries. Some industries require a lot of labor and time spent. Of course, it’s better if the entrepreneur has a certain understanding and experience of the industry.