Franchise Business Versus 2 Takka

The first question that we have been asked by the franchisees while discussing a franchise proposal is “Kitna paisa niklega?” which means “How much will be my Return on Investment (ROI)?” The discussion about the brand, operational support and other queries begin after this. This is the most important question as 80% people invest for returns on investment (ROI) and only about 20% of people do it for other reasons. The problem arrives when the franchisee expects a minimum ROI of 2-3% a month which will be 24-36% from the first year itself. This article will help you comprehend the difference between ROI calculation in the franchise business and parking the funds with a bank or rotating it in the market. Everyone is aware of the fact that you get 8-10% ROI on your fixed deposit with the bank. Thus, your investment will fetch you a minimum of 8% without taking any risks. You may also plan to rotate your funds in the market which may fetch you around 15-18% with minimum risks. So, the question mark arises when you see a good company’s business model and the ROI is around 15-18% or in some cases even less than 8%. Over here, you find yourself comparing the business ROI v/s the non-business ROI. A one year calculation may not show you an excellent ROI in a lot of cases as businesses are not built with a one year time frame. The difference between the two is that in one case you are building a business while in the other you are just depositing funds. There are certain parameters which differentiates Business from Deposit: 1. Deposit doesn’t have a yearly growth while a business surely gives you a yearly growth. 2. You can put in extra efforts to increase growth in your business which you cannot do in case of deposit. 3. There is immense learning while you are operating a business which will not happen in case of deposit. Once you learn to manage one business then it is just about replicating the same in any new business. The second and the third point mentioned above are fairly simple to understand. Hence, let us focus on the first point that is regarding the yearly growth. Illustration: Consider that you have invested INR. 30,00,000 in a fixed deposit. In this case, taking an interest of 10% you will make INR. 33,00,000 at the end of first year which is an ROI of 10%. Again at the end of second year you will again get 10%. Thus, at the end of fifth year you will make INR. 48,31,530 which is an approximate 60% ROI on your INR.30,00,000 over a five year period. Consider that you have started a business with an investment of INR.30,00,000. The business does a turnover of INR.60,00,000 and your margin is 30% which comes to INR.18,00,000 while your expense is INR. 16,00,000. Thus, you make INR. 2,00,000 at the end of first year which is an approximate ROI of 7%. Hence, as a franchisee you might think why should I not make 10% on bank deposit and put my money in to this business. The reason to this question is that business gives you a possibility of year on year growth which is surely not going to happen in case of a deposit. Let’s take a nominal growth of 15% every year on your turnover and a nominal increase in expense by 5% every year as expenses don’t grow at such a high pace. Below will be the working for a five year period:    Investment  Turnover  Margin  Expense  Profits Year 1          30,00,000          60,00,000  18,00,000  16,00,000    2,00,000 Year 2          69,00,000  20,70,000  16,80,000    3,90,000 Year 3          79,35,000  23,80,500  17,64,000    6,16,500 Year 4          91,25,250  27,37,575  18,52,200    8,85,375 Year 5       1,04,94,038  31,48,211  19,44,810  12,03,401   Thus, you make a total return of INR. 32,95,276 over a five year period on an investment of INR. 30,00,000 which is an approximate 110% ROI. In this illustration, we have taken a nominal turnover of INR.5 Lacs per month which gives you INR.60 Lacs for the first year. It is clearly visible that with such minimum turnover’s and minimum growth rate on year on year basis you can achieve around 50% (110% - 60%) increase in return on your investment. As said by Richard Branson, “Business opportunities are like buses, there’s always another one coming.” Explore your opportunities. You might just come across the best deal ever.