Hi All,
Franchise, Franchise!
Does anyone remember the movie The Founder? It's based on the McDonald's story and how it all started. A significant part of that movie focuses on franchises and their advantages and disadvantages.
In today's uncertain world, many of us consider franchising to earn passive income or to create an additional Income stream. Let's delve into the franchise business model to determine if it's a worthy investment, or if there are better options in alternative investment funds.
Below is an example of a coffee/food franchise unit model. This data is based on the FOFO (Franchise Owned and Franchise Operated) model.
Investment or Cost to Start a Franchise
Capex of 45 lakhs This amount is used by the company or brand to build the store, cafe, or food retail outlet according to their brand guidelines or standard operating procedures.
Brand Fees - 5 lakhs (One-Time)This is a one-time fee charged by the company to the franchisee to commence operations. Some companies categorize this as a marketing fee, while others consider it a one-time cost.
Earnings Model
Here’s a simplified model to illustrate potential earnings:
Net Sales: 100
Cost of Goods Sold (COGS): 30
Gross Margin: 70
Expenses:
Manpower: 15
Utilities: 5
Rent: 15
Marketing: 2
Miscellaneous: 4
Delivery Cost: 10
Royalty: 8
Total Cost: 59
EBITDA (Gross Margin - Total Cost): 11
If the franchise achieves sales of 10 lakhs per month, you can earn approximately 1.10 lakhs, or a 10% return. After investing 50 lakhs, the payback period would be approximately 45 months, or roughly 3 to 3.5 years.
Key
Key Considerations before we decide to go for Franchise
1. Purpose: Investment or Side Income?
If your primary goal is investment or side income, consider the following comparison. Had you invested 50 lakhs in the following asset classes, your returns over three years might look like this (note: these are estimates and not professional investment advice):
Fixed Deposit (FD): 6% annual return
Corporate Bonds/P2P Lending: 9% to 10% annual return
Mutual Funds (Top 50 Companies): 12% annual return
Other investment classes might offer higher returns but come with increased risks.
Conclusion: If your main objective is investment, analyze the math and compare it to alternative investment options. I'm not implying that franchising is a bad choice; rather, evaluate the business potential of the franchise before making a decision. The above figures provide a broad perspective to help guide your decision.
2. Purpose: Understanding Business Functions
If your goal is to understand business functions before starting your own venture, then franchising can be a good choice. However, it should ideally offer a return that beats the minimum return of a fixed deposit.
By carefully considering these points, you can make a more informed decision about whether franchising aligns with your financial goals and business aspirations.
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