How long should it take to make my initial investment back?

Louise Harris writes:

The initial investment in a franchise varies greatly across the industry, but it’s one figure franchisees should have a clear handle on before buying in. Once known, a key question is how long will it take to make that investment back? Of course, it varies.

There are a few rules in franchising. The first is you must be able to make your investment back within the term of your franchise agreement. A five-year agreement, therefore, indicates a maximum of five years to recoup your initial investment.

That alone, however, is not necessarily very attractive, since this implies no profit in that time. Unless you’re a pilot franchisee - testing the initial model or its expansion beyond the home territory - you should ask the franchisor for evidence that it’s possible to achieve its projected income and profit. If it can’t provide this, you should ask the franchisees who are trading.

It’s fair to expect that the business may not break even in the first year, but beyond that, it will depend on the anticipated growth of the customer base, sales of the goods or service, capital expenditure required and costs.

Make sure you get under the skin of the financials before buying into the model, as it may not be for you.