Franchise Speak

Franchising vs. Stock Market Investing ROI

When you’re looking into franchising, it may cross your mind to ask the question of whether you’d be better off putting that money into the stock market instead.  Lets have a chat about it.  Which one will have the better ROI or return on investment? If it doesn’t cross your mind before you buy a franchise, it will afterwards.

When you invest in the stock market we expect a return of 10-20%.  Based on an optimistic attitude that we can beat the market and the average annual return over a very long period of time.  Note: This is nothing more than an educated guess.  You can of course do better or worse as with any investment.   For the scope of this article though, we invested $100,000.00 and a year later we have $115,000.00 (15% return), which we earned by passively buying a stock and letting it sit. 

When you invest in a franchise, we battle much harder to try and find an educated guess about what the return (ROI) is going to be, due to there being little to no regulation and oversight of the industry as compared to stock investment.   Irregardless we can look at what the return would need to be in order to make it a better investment than stocks and let you choose for yourself whether the franchise you’re evaluating can meet the goal. 

When you examine a franchise, there is an oft overlooked ROI killer.  You cannot look at the return without factoring in your time.  Comparing an active investment to a passive investment is a bit like apples to oranges, until you monetize your own particular hourly wage.   This number can be very personal and can change dramatically from person to person.  Look at it like this, if you are going to spend 40 hours a week managing your new franchise, the dollar to dollar return on your initial investment needs to be 100-200% higher than a passive investment, because your time is worth something. 

Therefore, we’d need to earn $30,000 to $50,000 year over year on our initial $100,000 investment to make it just an even investment with stocks.  To be a better investment you need to go even higher. 

Boiling it down to basics, you have to see that when you buy a stock you’re trusting that CEO or President to run that company according to your goal of earning 10-15%.  When you’re buy a franchise you’re trusting yourself to meet those goals.  So it’s time for some honest thinking.

When you are ready to invest, think and truly ask yourself.  Can you do it  50-100% better than the CEO of multi-billion dollar companies.  As when it comes down to the bottom line, you’re starting a business yourself (albeit controlled by a franchisor) making a major investment in time and money and betting that the franchisor you’re trusting and yourself combined are going to be able to do it better than an executive at publicly traded XYZ company.  Hey XYZ company would never have gotten to be the big company it is, if someone didn’t take the risk to say they were better than the people doing it already.