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How can you establish when you’ll break even?

Written by Nigel Toplis on Monday, 12 June 2017. Posted in Insight

Working out when you’re likely to recoup your initial investment in a franchise isn’t straightforward but there are ways to calculate a ballpark figure

How can you establish when you’ll break even?

There's no algorithm that can accurately calculate your return on investment – neither in a franchise nor an independent business. Different franchisees will have different break-even points. Similarly, a franchise that calls for significant investment up front will take longer to pay back than a franchise that needs little. A franchise that requires premises, high levels of stock or a significant outlay for machinery will naturally take longer to pay back than a franchise where you’re working from home.

Even within a franchise, it's difficult to be definite about when you might break even. Two franchisees starting at the same time in the same business can have markedly different returns. Much will depend on the franchisees’ own level of activity, their drive, ambition, individual skills, competence and willingness to follow the business system. What a franchisor can say is that if you follow the system, market the business in the manner you're shown and are ambitious, driven to succeed and prepared to put the hard work in then you could expect to break even within a certain period.

However, when you're considering which franchise to invest in, the point you’ll break even is an important consideration. I would advise that you work with your accountant and do your own financial modelling. Take the financial parameters as detailed by the franchisor as a good starting point but then add in your own assumptions about the market, your potential penetration of that market, the prices you think you can charge, the percentage of repeat purchases you would expect and how quickly you feel you can add new customers to your pool.

The franchisor will have an outline of their expectations in terms of factors like turnover, gross margin, costs and net margins. Use these as a guide but run through three different scenarios for your own peace of mind. Firstly, you should assess the expected performance – which will fairly closely match the franchisor’s model. Then do a calculation that’s on the conservative side with lower turnover and higher costs as a what-if scenario. Finally, do a more positive calculation with lower costs and better-than-expected turnover and margins – just to see what the figures would look like if you're as good as you think you might be. Once you have your three options, speak to some other franchisees and get their thoughts on your expectations before explaining to your franchisor how you’ve arrived at the three options.

Between your efforts, the input from other franchisees and a discussion with the franchisor, you'll arrive at a fairly accurate financial picture of the business. After taking this back to your accountant and getting their professional input, you should then have a clear sense of when you’ll break even.

About the Author

Nigel Toplis

Nigel Toplis

It’s safe to say Toplis has form when it comes to franchising. As managing director of The Bardon Group, he has led the growth of some of the UK’s best-known franchises, including The Zip Yard and Kall Kwik. Toplis lists work as one of his hobbies but he also enjoys his fair share of travel, horse racing and red wine.

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