You’ve zeroed in on what appears to be an amazing franchise opportunity. The company’s Franchise Disclosure Document (FDD) shows strong earnings, and the franchise owners you’ve spoken to say they’re happy with the support they’re receiving from the corporate office. Despite your best research efforts, you may still be missing a key piece of information to determine whether your business will likely be profitable in the long run. It all comes down to evaluating franchise ROI — its return on investment.
Understanding and calculating your potential ROI is a crucial step that empowers you to make an informed decision about a particular franchise opportunity. It not only helps you determine if you can afford to invest but also provides a realistic expectation of your earnings.
Why Evaluating Franchise ROI is Essential
Before you commit to any franchise opportunity, it’s essential to gauge its financial potential in the short term and over time. This evaluation not only helps you understand if the opportunity aligns with your long-term financial goals but also assists in assessing if the potential return justifies the financial risk. Typically, a franchise’s ROI isn’t explicitly stated in any document or on the company’s website.
You can find some earnings projections in your Franchise Disclosure Document (FDD) under Item 19. This section provides Financial Performance Representations (FPRs), giving insights into how much franchisees might expect to earn. It often includes historical sales figures, average revenues, gross profits, or other performance metrics provided by franchise owners or company-owned locations. However, Item 19 data might only represent top-performing units open for a certain amount of time. Plus, it often lacks net revenue projections. Other sections of the FDD can tell you how much you can expect to pay in franchise fees, startup costs, and royalties to estimate your total investment. Still, this information doesn’t typically estimate ongoing staffing or maintenance costs.
In addition to gathering information about average revenues and costs, you want to know how long it might take for your business to become profitable and what that profit could be.
Understanding Franchise ROI: What It Really Means
Franchise ROI measures how much profit you can expect to make compared to your investment. You can calculate a franchise’s ROI by dividing your net profit by your total investment and multiplying it by 100, but first, you must understand how to estimate both sides of the equation.
Factors Impacting Franchise ROI
Several factors play into a business’s ROI. For example, some industries, like home services, lend themselves to higher margins or scalability. In all cases, franchise owners who can manage their businesses efficiently tend to be the most profitable.
Typical ROI by Industry
| Industry | Average Annual ROI | Notes | Source |
| Food & Beverage | 4% – 10% | High competition and overhead; many owners earn under $50K/year | Franchise Business Review |
| Education & Tutoring | 10% – 20% | Lower overhead: demand for services can lead to higher margins | Mathnasium franchisees report an average annual revenue of $360,324, with an operating profit of approximately $115,743, yielding an ROI of about 32% |
| Health & Fitness | 10% – 15%+ | ROI varies by location and services | According to Exercise.com, The average gym profit margin is 10-15%, with franchise gym profits on the lower end of 10% and CrossFit gym profit margins in the 25-30% range. |
| Senior Care | 10% – 20% | Many senior care franchises operate without the need for expensive real estate or inventory | Source: Senior Care Authority |
| Home Services | 15% – 25% | Profits around 23.3% on $777K average revenue | Source: Sellbery |
| Retail | 5% – 12% | Wide variation depending on product mix and location |
Key Metrics to Assess Franchise ROI
Before calculating ROI, you should estimate your total investment and net profit. Your total investment includes your initial franchise fee, startup costs, and ongoing costs such as royalties and employee salaries. Your net revenue includes all of your sales minus all expenses, including rent, labor costs, fees, and taxes. Some of this information is not spelled out in your FDD.
Initial Investment & Startup Costs
Initial investment costs, or startup costs, are all of the expenses you incur to support the launch of your new business. To estimate your initial investment, you should add up the following, most of which you can find in an FDD:
- Franchise fees
- Real estate and construction cost
- Equipment and inventory cost
- Working capital
Your working capital, or the amount of money you plan to borrow or spend to launch your business, may be prescribed by the franchisor. But this number also includes any contingency funds you’ll need to keep yourself afloat as you grow your business.
Revenue Potential & AUV
As your business flourishes, you should begin earning more revenue to offset initial and annual expenses. To understand what that might look like, you need to calculate your Average Unit Volume (AUV). This number reflects the average annual revenue your franchise unit is estimated to earn. For example, a McDonald’s franchise unit makes, on average, $3,505,000 in revenue (AUV) per year. However, Cinnabon earns an AVU of only $295,000, according to Restaurant Business. Comparing AUVs helps you set realistic income expectations.
Ongoing Expenses & Royalties
When you invest in a franchise, you are responsible for more than your initial investment. Most franchises charge royalties on gross monthly sales and charge marketing and technology fees. Depending on your business, you can also expect to pay employee salaries, utility bills, and building or equipment maintenance. These recurring costs can significantly affect net profitability and ROI.
| The example below shows the information you would use to calculate your ROI by adding up your total investment and net profit. | |
|---|---|
| Initial Franchise Fee | $40,000 |
| Buildout/Equipment | $110,000 |
| Other Startup Costs | $50,000 |
| Total Investment | $200,000 |
| Annual Revenue | $350,000 |
| Operating Costs | $270,000 |
| Net Profit | $80,000 |
ROI = (80,000 / 200,000) × 100 = 40%
In this case, you could expect to earn 40 cents in profit for every dollar invested.
How to Research a Franchise’s ROI Before Investing
Reviewing an organization’s FDD reveals many details you’ll need to calculate ROI, but it’s not the only source of information. The FDD contains critical financial details, including initial investment (Item 7) and, if available, earnings claims (Item 19). However, not all franchisors provide Item 19. It’s important to contact current and former franchise owners (listed in Item 20 of the FDD) to get real-world insights into actual financial performance and any operational hurdles you might encounter.
Avoiding Common Pitfalls: Franchise ROI Tips
Each franchise is unique, even if it follows the same corporate playbook. Your geographic location, demographics, and foot traffic can boost your success or make you less profitable than other locations. You might also encounter hidden costs, such as unexpected maintenance costs or a downshift in the economy, which can skew ROI calculations.
It’s important to look at all scenarios. While your franchisor can provide you with financial projections, you should always use conservative estimates and verify those with current or former owners.
Most Common Hidden Costs When Evaluating Franchise ROI
When calculating your ROI, look out for hidden or less obvious costs that may impact your profitability and cash flow. Here are a few of the most common ones.
- Additional Marketing and Advertising Fees: Many franchises require that you contribute to a national or regional marketing fund, but you may also have to spend a percentage of your revenue on local marketing or pay supplemental marketing fees not disclosed in the FDD.
- Ongoing Software and Technology Fees: Expect to pay for proprietary software licenses, technology support, or required point-of-sale systems, which are typically listed in the FDD but often left out of ROI calculations.
- Renovations and Upgrades: Franchisors may also ask you to spend money on periodic updates to signage or other items, which can be overlooked in ROI estimates.
- Professional Service Fees: Franchises are businesses that require legal, accounting, and consulting services. Fees for these services may be included in your Franchise Agreement but might also be necessary for compliance.
- Supplier Restrictions: Franchise owners typically buy inventory or equipment from suppliers as stipulated by the franchisor in Item 8. If these suppliers raise prices more than expected, you may experience a lower ROI.
- Renewal and Transfer Fees: Even if you’re successful, continuing your franchise beyond its initial contract term often requires paying a renewal fee. Also, if you want to sell or transfer your franchise, you might have to pay transfer fees that lower your bottom line.
- Mandatory Training Costs: Some franchisors include initial training as part of the franchise fee. However, ongoing training costs for new staff, managers, or those seeking to upskill include training, travel, and lodging.
- Working Capital Needs: Many new franchise owners underestimate the amount of money they’ll need to cover operating expenses during the ramp-up period before their business becomes profitable.
- Insurance and Compliance Costs: Examine all required insurance policies you’ll need to follow (liability, property, workers’ compensation) and costs to comply with local regulations carefully, and include those estimated expenses in your ROI.
- Liquidated Damages and Early Termination Fees: If business isn’t going well, you may have to pay to terminate it early. Your Franchise Agreement may require you to pay liquidated damages or lost future royalties, which can take a bite out of your ROI.
How to Maximize Franchise ROI
Franchise owners who invest in proven franchise concepts with high employee satisfaction tend to enjoy higher ROIs than franchise owners who receive little corporate support from companies with shorter track records.
Look for high-margin, scalable models that show growth and high franchisee satisfaction. Often, franchises with lower initial investments make you profitable faster—but not always. The more support you receive from your corporate leadership team, the more quickly you can focus on refining your operations to optimize your financial performance. Once you learn your business, focusing on continuous improvement and customer satisfaction can help you sustain profitability. It’s critical to take advantage of any training, marketing, or operational resources provided by your franchisor to make small changes that can reap lucrative rewards.
Conclusion & Call to Action
Franchises can offer you a proven concept that you wouldn’t get building your own business from the ground up. However, you must research each opportunity thoroughly before you take the leap. Carefully evaluate all costs, revenue potential, and operational factors, and use the company’s FDD, franchisee interviews, and franchise satisfaction surveys to validate your projections. By following a disciplined approach to calculating franchise ROI, you can decide which brand will be the best fit for you.
