When Buying a Franchise Calculate Your ROE
by Ed Teixeira
When evaluating a franchise opportunity, the return on effort or ROE can be
just as important as the return on investment or ROI.
When individuals consider purchasing a franchise, an important part of the
evaluation process is projecting the ROI or return on investment. Although the
calculation of the ROI will be an estimate, it will at least provide a snapshot
of what you could expect to earn on the money that youíre investing in the
franchise. To view the ROI process you can
calculator on the FranchiseKnowHow website.
In addition to the ROI there is another calculation that should be made. Weíll
refer to it as the ROE or return on effort ( not return on equity). I define the
ROE as the time, attention and personal cost that needs to made in a franchise
in order for that franchise to be successful. Based upon the operation, some
franchises require less time and effort than others. As a franchisee, this
investment canít be dismissed. Since there are franchise opportunities in
virtually every segment of industry, there are a variety of franchises to choose
from. When making a choice, the ROE can be every bit as important as the ROI.
Imagine investing in a franchise and finding out that the amount of hours and
attention needed to be successful is far greater than what you expected or were
led to believe? If youíre not able to make the commitment, you face the risk of
losing your franchise and the money youíve invested!
Calculating Your ROE:
- Begin with an honest appraisal of just how much time and
effort youíre willing to devote to the franchise. In my
experience Iíve observed a good number of franchisees
underestimate the amount of hard work it takes to be successful.
Be sure that youíre willing to pay the price.
- What time and attention are you able to commit to the
business? Based upon your personal situation and the
requirements of the franchise operation can you meet the
physical and time requirements the operation requires?
- The type of franchise will dictate to a great extent the
requirements needed to be successful. Operating a restaurant or
convenience store franchise, thatís open seven days a week and
twelve hours a day, requires a major committeemen both mentally
and physically. Many of these concepts lend themselves to a
- Does the franchise operation lend itself to a manager or is
it fundamentally an owner operated franchise? An unwritten rule
of franchising is that the lower the investment the more
important the role of the franchisee will be in having a
- Are there personal factors that can interfere with the
effort required for a successful franchise? I once worked in a
retail franchise concept, where a franchisee told me that the
franchise was responsible for lots of divorces due to the nature
of the business.
- Speak with as many franchisees as possible, including a mix
of franchisees with one to five years experience, to find out
what they feel is the effort needed to be successful.
- Finally and most importantly measure your ROE to your ROI.
There are franchisees earning 50K per year which represents a
poor return on their investment. Some others might be satisfied
with that result. Some franchisees earn minimum wage after
considering the number of hours they work. If you can earn the
same amount working fewer hours for someone else without risking
your money perhaps a franchise isnít your best choice.
If youíre considering investing in a franchise donít forget to identify your
ROE. Although you might not calculate a true financial result the process can
help you determine the total investment youíll be making.
© 2012 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at