Investors deciding on whether to jump into a franchise opportunity commonly hear the acronym ROI thrown about. But understanding what it means for future financial success and a possible investment is extremely important.

When individuals invest in the stock market, they are making a passive investment - they invest money, but not time - and know exactly what the rate of return should be. However, opening a franchise is anything but a passive investment, Entrepreneur magazine writes.

Because franchisees invest time, talent and money into the operation, their rate of return should be accordingly higher. While determining the ROI for strictly financial investments is fairly straightforward, quantifying time and talent can pose a challenge for interested franchisees, the magazine reports.

Franchisees can begin determining their potential ROI by calculating the monetary return first. All new businesses generally go through a startup phase in which they experience a loss of revenue. After two to three years, the business will break even and see a rapid increase in profits before it stabilizes. Franchisees should base income expectations on data from after this period.

Entrepreneur suggests that because starting a business presents a higher risk than purchasing stock, franchisees should expect a healthy 15-percent return. Franchisees who invest $100,000 in a business should expect at least a $15,000 return per year.

However, calculating the ROI on time invested is much more difficult. First, franchisees will need to ask themselves a series of questions, such as how much their time is worth and what they were previously paid for their work. The amount of money for which a franchisee could easily trade his or her time should be the amount they expect to get back, the magazine reports. For example, if a franchisee was previously paid $70,000 annually, it is reasonable to assume that this would a fair compensation for full-time work in their business.

Simply asking a franchisor how much money a franchise can bring its investors may not result in a great amount of information, AllBusiness.com writes. Franchisors are bound by Federal Trade Commission requirements on how they present earnings, which if misrepresented could get them in legal trouble. The Web site suggests that interested individuals contact potential franchisees for earnings statements.




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