Is This Franchise Actually Worth Your Investment?

What Is a Good ROI for a Franchise?

This is where most franchise buyers get tripped up. They see a franchise generating $150,000 in annual profit on a $200,000 investment and think they're looking at a 75% return. But that math is incomplete because it ignores one of the biggest costs of franchise ownership: your time.

When you buy a franchise, you're not just investing money. You're investing 50 to 60 hours a week of your life, especially in the first few years. If you could earn $80,000 a year at a corporate job instead, that salary is a real cost of your franchise investment. Subtract it from your profit before calculating ROI, and suddenly that "75% return" drops to 35%. Still good, but a very different story.

The 15% Rule of Thumb

Industry experts generally suggest that a franchise should produce at least a 15% to 20% annual return on invested capital after the business matures, which usually takes two to three years. That target is higher than what you'd earn in the stock market (historically around 10% annually for the S&P 500) because franchise ownership carries more risk and demands your active involvement.

If the numbers show a return below 15%, you need to ask yourself a hard question: would your money and time be better spent somewhere else? A franchise returning 8% while eating up 50 hours of your week is objectively a worse deal than an index fund returning 10% while you keep your day job.

Why the Payback Period Matters More Than You Think

The payback period tells you how long it takes to earn back your initial investment through the business profits. For most franchises, this falls somewhere between two and five years. Anything under three years is strong. Anything over five years is a yellow flag that deserves serious scrutiny.

Here's why payback period matters so much: every month you're waiting to recoup your investment is a month where that money could have been earning returns elsewhere. A franchise with a six-year payback period means you're essentially locked in for half a decade before you even get back to zero. Factor in the risk that the business could fail during that window, and you start to see why this number carries so much weight.

Cash-on-Cash ROI and SBA Financing

If you're financing your franchise through an SBA loan, the math changes significantly. While the SBA minimum down payment is 10%, most lenders require 10% to 30% for franchise acquisitions, with 20% being the most common requirement in practice. That means you can control a $300,000 franchise for $30,000 to $90,000 out of pocket. Your cash-on-cash return (the return on just the money you actually put in) can look dramatically better than the standard ROI calculation.

But there's a catch. Your monthly loan payments become an operating expense that reduces your take-home profit. A franchise that looks great on a cash-on-cash basis can still leave you cash-poor if the loan payments eat into your monthly income. Always run the numbers both ways before deciding how to finance your investment.

What the FDD Can and Can't Tell You About ROI

The Franchise Disclosure Document's Item 19 is your best source for revenue and expense data from existing franchise locations. But even when franchisors include Item 19 (about 86% do now), the numbers they share are often averages or medians that can mask huge variation between locations. A franchise system with a $500,000 average revenue might have individual locations ranging from $200,000 to $900,000.

Your job is to dig past the averages. Request data broken down by region, store age, and location type. Talk to existing franchisees (the FDD includes their contact information in Item 20). The franchisees who have been in the system for three or more years will give you the most realistic picture of what your ROI could actually look like.

What This Calculator Doesn't Capture: Resale Value

The five-year projection above only shows your cash flow returns. It does not include the value of the business itself, which is a real asset you can sell. Established franchise locations typically sell for two to four times annual cash flow, depending on the brand, location, and growth trajectory. A franchise generating $100,000 in annual profit could be worth $200,000 to $400,000 at exit. That resale value is an additional return on top of everything shown in your projection, and it is one of the biggest advantages franchise ownership has over a salaried job.

Plan for the Ramp-Up Cash Burn

If your Year 1 projection shows a loss, that loss represents real cash you need on hand to survive the first year. Many first-time franchise buyers budget for the initial investment but forget they also need liquid reserves to cover operating losses during the ramp-up period plus their personal living expenses. If the projection shows a $70,000 Year 1 loss and you need $60,000 a year to live on, you need roughly $130,000 in accessible cash beyond your franchise investment. Running out of cash in Year 1 is one of the most common reasons new franchise owners fail.

Data sources: FranChoice ROI Guidelines, Franchise Beacon Investment ROI Benchmarks, 2024 Annual Franchise Development Report (Franchise Update Media), S&P 500 Historical Returns (NYU Stern), Federal Reserve Economic Data (FRED), National Association of Realtors Rental Yield Data. SBA financing guidelines per SBA.gov standard operating procedures.