If you’re asking a question on how to recognize a franchise that’s definitely worth investing in, and you only get clear cut, unequivocal, or outright certain answers to this inquiry, then you should probably look for your answers elsewhere. There are multiple different factors and variables that should be weighed in before getting any concrete answer based on which you’re making a final decision about such move.
Although ROI (Return On Investment) story is the one that you hear about at the very beginning and is probably one of the first things you’ll learn business-wise, it still isn’t something which you should approach completely nonchalantly or negligently. Making a correct assessment about a franchise you’re interested in investing your money in is of utmost importance. This is also the reason why we give you the following simple yet effective tips on how to correctly estimate the value of a business.
The Return Of Investment 101
We’ve already mentioned that the ROI counts as a basic business terminology. But why is it then sometimes so hard to evaluate if the franchise is actually worth your hard-earned money? At least the answer to this question is quite simple: because things aren’t always that straightforward and uncomplicated.
Now, this doesn’t mean that the situation is always complicated and difficult. There are of course the cases in which you don’t have to cut the Gordian knot, and in which doing the simple math would suffice. For instance, if you expect the average cash flow generated from the franchise to be around $100,000 per year, and the upfront investment is $400,000, then the return of investment would be about 25%. Pretty easy, right? Well, not exactly.
’Passive’ and ’Active’ Investment
The type of investment in which you don’t have to put your actual time (only money) is called passive. Let’s go back to the case of the aforementioned example in which the return of interest is 25%: if it doesn’t require any of your personal time, we would have to say that the deal is fantastic, by all means, and criteria.
We would recommend you to look for a particular franchise for sale in Australia, and then determine if it’s a good deal or not. The general rule of thumb would be that anything from around 5% to 12% and higher is considered to be a good deal on passive investment. If the annual return is below 5%, then you should reconsider your move.
The ’only’ downside is that a franchise is almost never considered to be a passive investment. If you have to spend any amount of your time dedicating it to the franchise you bought, then it counts as an active investment.
Other Factors To Consider #1: The Actual Time You Put In
The fact that a franchise is almost never considered to be a passive investment means that there are other factors to consider and things to keep in mind here. In any given world, this would have to count as a good investment. On the other hand, if this type of (honestly very handsome) return eats the majority of your time, then you also need to ask yourself another question: is it worth investing, if I have to work 14 hours a day to get that kind of return?
Other Factors To Consider #2: Your True Salary
In case it’s not alright with you to work day and night, then another option would be to hire a manager that’s going to do part (or the majority) of the stuff that eats away your time. But now you have to pay that person her or his salary annually, so your true salary naturally decreases. Instead of $100,000 per year, suddenly it comes down to, let’s say, $50,000. This is now basically the question if the investment is passive or active.
Evaluating and Calculating a Reasonable Return of Investment
When all these different things and variables are involved, you realize that the simple math from the beginning doesn’t work anymore – or at least it doesn’t give you a clear picture of things. After you’ve factored in all the necessary work and hours that you need to dedicate to the franchise, it’s time to think about calculating a reasonable return of investment.
You should also be aware of the ways the market typically functions, especially since this is something which changes and fluctuates all the time. That’s one of the reasons why we even face these return of investment complications.
The most important thing that you need to consider when making this kind of evaluation is to try to look at your personal situation from every possible angle. If you end up making $50,000 and you’re still working full time, but you’re satisfied nevertheless, then you should go for it. If this type of work is something that you really enjoy and you believe it’s worth doing, then you shouldn’t listen to anyone else but you. This is something which can be referred to as a ’non-monetary value’. These are simply the things that you can’t put the price tag on so easily.
If you’ve already made up your mind, and you want to find the most suitable franchise to invest in (with good ROI rates), then there are myriad of things you ought to think about in advance. Depending on the amount you intend to spend, the time you’re willing to dedicate/ sacrifice, and the overall expectations in terms of ROI, you make the overall evaluation and calculations.
But you should also at the same time think about your particular situation, future plans, and goals, what drives you and moves you. No expert can tell you all these things at once, and no simple math can give you a definite answer to these questions. That’s why you need to cover some of the basic stuff and keep in mind the things that we’ve mentioned in this article. We would naturally advise you to be careful, but also to act if the right opportunity presents itself.
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