How to Calculate ROI (Return of Investment) of A Franchise

Investing in a laundry and dry cleaning franchise can lead to significant profits, but not all franchises are created equal. To make a smart investment, it’s important to compare the return on investment across different franchise opportunities. By understanding the ROI of each option, you can better predict your potential earnings and choose a franchise with the highest chances for profitability. In this blog, we will explore why Fabrico is a profitable choice for franchise investors in India and how to calculate ROI for a franchise.

What is Return on Investment (ROI)?

Calculating ROI (Return on Investment) is a crucial step in assessing the potential profitability of a franchise. It is a financial metric used to evaluate the profitability or efficiency of an investment. It measures the return (or profit) generated relative to the amount of money invested. In simple terms, ROI tells you how much money you earned or lost from an investment compared to its cost.

Formula for ROI (Return on Investment):

The basic formula for calculating ROI is:

Net Profit is the sum of all earnings from the franchise, after deducting the operating expenses that are included, such as franchise fees as well as royalty payments, labour rent, utilities and other operating costs.

Total investment includes the franchise fee at first as well as the setup cost (such as inventory, equipment real estate, the cost of renovation) along with any other capital costs.

How To Calculate Return on Investment (ROI) For A Franchise Business

ROI can help potential franchisees determine how much they can expect to earn on the amount they invest. Here's how to determine ROI for a franchise business:

ROI = (Net Profit ÷ Cost of Investment) x 100.

Example: If you invest INR 20,000 in a business and earn INR 4,000 in profit, your ROI would be:

ROI = (4000 ÷20000) x 100

This means you earned a 20% return on your investment.

Steps to Calculate ROI:

Determine Your Net Profit

Net profit is the amount of money you earn after all expenses have been paid. This includes:

• • Revenue from sales and services

• • Subtracting the operating costs such as salaries, utilities, rent, marketing, and other overhead expenses

• • Deducting ongoing fees such as franchise royalty payments, advertising contributions, and any other recurring costs

Example: If the franchise generates INR 200,000 in revenue and your operating expenses (including royalty payments, salaries, utilities, etc.) total INR 160,000, then your net profit is:

Net Profit = Revenue − Expenses = 200,000 − 160,000 = 40,000

Calculate Total Investment

Total investment includes the initial and ongoing costs you incur when opening and running the franchise. These costs generally include:

• • Initial franchise fee

• • Real estate and location setup costs

• • Equipment, inventory, and furnishings

• • Marketing and advertising expenses for your launch

• • Legal and consulting fees

• • Any other startup capital required to get the franchise operational

Example: If you spent INR 100,000 on franchise fees, INR 60,000 on location setup, INR 40,000 on equipment, and INR 20,000 on marketing, your total investment is:

Total Investment = 100,000 + 60,000 + 40,000 + 20,000 = 220,000

Apply the ROI Formula

Now that you have both the net profit and the total investment, plug these values into the ROI formula:

ROI = ( 40000 ÷ 220000 ) x 100 = 18.182

This means your ROI is 18.18%, indicating that for every INR you invested, you earned 18.18 cents in profit.

Interpreting ROI:

• • A higher return on investment means more profit for the investment and can appeal to prospective franchisees.

• • Low ROI, or negative ROI may indicate that the franchise isn't making enough money to justify the investment, or the franchise's costs are too excessive.

Factors Affecting ROI:

A variety of factors can impact the return on investment of a franchise.

• • Franchise Fees and royalties: More fees and royalties could reduce the ROI of a franchise if it has a high volume of sales.

• • The location: A franchise that is well-placed will generate more revenue which can boost the ROI.

• • Efficiency and Management An efficient franchise that has efficient processes is likely to have greater profits margins.

• • In the event of a strong demand for the item or service, the ROI is likely to be greater.

Large initial investment may hinder the attainment of the desired ROI, so it is important to think about how long it'll take to achieve a profit.

What is Negative ROI (Return On Investment) and What Does It Mean?

Negative ROI (Return on investment) occurs when an investment results in a loss instead of making a profit. This means that the investment's returns are lower than the amount that was invested, which results in negative numbers in an ROI formula.

Example of Negative ROI:

Suppose you invest INR 20,000 in a business, but after a year, your total earnings amount to only $14,000. The net loss would be:

Net Profit (or Loss) = 14,000 − 20,000 = − 7,000

Now calculate the ROI:

ROI = ( -7000 ÷ 20000 ) x 100 = -35%

This means your investment resulted in a 35% loss, giving a negative ROI.