There is an endless number of ways to invest your money. You could play the stock market or buy a classic car. You could purchase government bonds or collect rare records. Or you could invest in your own future and start a franchise. Here, we take a look at what investing in a franchise involves and how you can go about it.
What is investing money?
Put simply, investment is the process of purchasing an asset with the intention of increasing its value over time. In other words, investors buy an asset that is capable of generating income or appreciating as time passes, earning them profit in the process.
Despite this seeming like a relatively simple idea, investment can be remarkably complex. While most people will have a basic understanding of investing in simple products, such as a bottle of wine or a collectable item, they may not have such a developed knowledge of investment in complex assets, such as derivatives like futures contracts and warrants. This is primarily due to the way in which the term investment can be applied to almost anything that can appreciate (or depreciate) in value.
When talking about investments, it’s important to recognise that all investments involve some element of risk. Whenever you put your money into an investment, there is the chance that you will come out of the transaction worse off than you went in. In this sense, investing is a gamble where the risk can be mitigated by taking certain precautions.
Make money investing
Individuals and organisations make investments because of the possibility of turning a profit in the future. Generally, the higher the risk associated with an investment, the higher the potential return. However, this isn't always the case, and many investors make unwise investments by putting their money into an asset that doesn’t adequately balance risk and reward.
To make money from investing, it's necessary to consider how much profit the asset is likely to return and what the likelihood of the investment succeeding or failing is.
Return on Investment
Return on Investment (ROI) is a way of measuring how much profit you can expect to receive in return for your investment. It is typically calculated in the following way;
(Gain from investment – cost of investment) / Cost of investment = ROI
ROI is expressed as a percentage and is useful for comparing the returns on different investments. However, it does have certain limitations. For instance, it doesn't take into consideration the time frame over which profit is generated. To achieve a more accurate and in-depth account of what an investment is likely to return, ROI will need to be combined with other metrics, such as “Rate of Return.”
Active vs passive investments
Generally, investments can be split into one of two categories. The first is active investments and the second is passive investments. Passive investments are those that require nothing more than the initial outlay. They need no additional investment of time, knowledge, or effort and will appreciate or depreciate on their own. Investments like stocks and shares, as well as simple goods, can be put into this category. On the other hand, active investments are those that require the additional investment of time and talent. Franchises are one such investment – their success depends on the franchisee growing the business and putting many of their own resources into the venture.
Look at the real investment cost
When shopping for franchises, you’ll be confronted by a bewildering array of numbers and figures. While all of these figures are important, some are more vital than others. For instance, franchisees need to consider the real cost of franchise investment, rather than the initial or minimum price. While franchisors will be quick to advertise the initial investment required, this is often considerably lower than the total amount you'll need.
Some businesses require a considerable amount of working capital to get them off the ground and keep them ticking over as they grow. Not many enterprises are immediately profitable, and most will require a few months before they even begin generating revenue. All of this capital needs to be taken into consideration before any investment decision is made, as it will have a significant impact on how much you need to earn before you break even.
How to raise investment for your franchise
When it comes time to raise investment for your franchise, there are a few ways you can go about it. The most common means of finding capital is applying to a bank or other type of major lender. This will require you to draft a business plan and provide the lender with information about your financial history, too.
Alternatively, it may be possible to raise smaller amounts of capital from friends and family. In some cases, investing in your business may be a good way of growing their savings. This route has proven particularly popular amongst parents who wish to grow their “nest egg” and see investing in their child’s franchise as a safe way of doing this.
Seek professional financial assistance
As with all complex financial arrangements, it’s a good idea to have a professional financial advisor on hand to talk you through the details of franchise investment. This type of investment involves a large amount of legal documentation and will require you to make a vast number of financial calculations. To ensure that you have all the details in order and that you haven't missed anything, it's recommended that you utilise the services of an advisor. Similarly, most new franchisees also employ a legal advisor to guarantee that the legal paperwork accurately reflects the financial reality of the arrangement.
Request information from your franchisor
Finally, before making any investment, you’ll have to request financial projections and information from the franchisor. They should give this information willingly and be prepared to explain it and help you utilise it in the right way. It is likely to form an essential part of the business plan required to apply for finance.
The Editorial Team, Point Franchise ©