How to Pick a Franchise That Will Maximize Return on Investment

Because a lot of my franchise candidates are current or former corporate executives, they tend to have very strategic mindsets. Put another way: they like to know the end game before they start. That means I get a lot of questions about franchise exists. For some franchisees, an exit plan is about handing off the business to their children or grandchildren, but most franchisees buy with the intention of eventually selling their business. Here’s how I help them pick a franchise that will maximize their return on investment.

The Foggy Crystal Ball

First, I always emphasize that it’s impossible to predict the future. Just as in other industries, franchises are subject to trends. Although certain types of franchises are reliably popular (both with buyers and consumers), the exact supply-and-demand ratio may go up or down from year to year. And cultural or economic factors can affect the industry. As our culture has become more focused on mental health, for instance, more wellness-focused franchise brands have appeared on the scene.

The Question of Multiples

When you’re looking ahead to selling a franchise, you need to understand the concept of valuation multiples. Typically, your franchise’s valuation and selling price will depend on a multiple of your annual revenue. The multiplier, however, will vary depending on certain characteristics of your franchise. Your franchise might command a value that is 4x its annual revenue, while your buddy who owns a different kind of franchise might get a 6x multiplier. Why the difference? Keep reading to find out.

The Value of the Business Model

Generally speaking, your franchise’s business model will have the biggest influence on its value multiplier. So if you want to pick a franchise that will maximize return on investment, start with these factors:

• Leadership structure. Manage-the-manager, executive-model franchises generally get bigger multiples than owner-operator franchises.
• Number of units. From a valuation standpoint, multi-unit businesses are usually more desirable than single-unit businesses, since multi-unit franchises have built-in redundancy, economies of scale, and economic resilience.
• Product/service type. Franchises that provide essential services typically get higher multiples than franchises that provide products or services that are just a want. Among want-based products and services, luxury or premium versions generally do better than basic versions.
• Revenue model. A business with a recurring-revenue model – one that sells memberships or subscriptions – will typically be more desirable than one that depends on constantly winning customers for single-transaction relationships.

Labor Factors

A franchise’s labor structure also affects its value multiplier. When you’re looking to maximize ROI, consider these factors:

• Employee turnover. A business with high employee turnover is less desirable than one with employees who are loyal. This is a quality that is not baked into the business – it depends on your leadership style and the culture you create as the business owner.
• Employee status. Businesses with contract (1099) workers don’t necessarily get lower multiples than businesses with employees (W-2). However, buyers will look for evidence that each worker’s status is appropriate to their role, as defined by the federal government.
• Employee occupation. When compared to businesses of the same type, franchises with professional-level or credentialed/certified employees are usually more desirable. For instance, a tutoring franchise that hires only credentialed teachers will get a higher multiple than one that hires tutors who aren’t professional educators.

Operational Factors

Of course, how you operate your business matters, too. Franchise buyers want to see clean books, a positive relationship with the franchisor, and physical assets (such as equipment or a building) that are in good condition and have been regularly maintained.

In addition, franchises with PEOs are more desirable than those without. When a buyer sees that a business has been operated under a PEO, they know they won’t be inheriting issues with payroll, compliance, or liability. They’re more likely to feel that they can move forward with confidence.

Buy for Growth

Finally, if you want to pick a franchise that will maximize return on investment, buy for growth. Whether you’re applying to buy a new franchise from the franchisor, or bidding on an existing franchise from the owner, it’s better to buy small and build the business into something big and valuable on your own watch. Your profit will be much higher when you eventually sell.

And buying for growth has an added advantage: a better experience for you. If you’re like most of my candidates, you want to buy a franchise because you want to spread your wings. You’re looking for an opportunity to be in control of your own business, learn new things, solve puzzles or challenges, and create something new. You want to buy not just for the growth of the business, but for your own growth too.

Ready to make a smart wealth-building decision? You can take the first step with just a 20-minute phone call. Book some time on my calendar today for personalize help picking a franchise that will suit not only your skills and resources, but your financial and professional goals as well.