Ryan is an attorney and valuation specialist residing in Chicago. He chronicles his thoughts and research on FranchisePundit.com. You may reach him by email ryanknoll@gmail.com or mobile telephone 312-212-3423.
I’ve written several times that investing your $150,000 nest-egg in the public markets and working a reasonably fun job is an underappreciated alternative to applying it towards a franchise. This article cites a study by Vanguard’s founder John Bogle regarding a 25-year study of a diversified portfolio return that on average has yielded 9.5% annual return.
What would you hope your franchise is worth in 10 years? Does $372,000 sound good for a selling price, on top of the wages you earn by holding a typical job? The $372k is the approximately growth of your $150,000 investment in the market compounded at 9.5% annually for 10 years.
A great article on the lowest cost (0.15%) diversified publicly traded investment portfolio in the world is here
http://etf.seekingalpha.com/article/42883
The decision to invest in and hire yourself to manage a franchise is a personal balancing test of many factors – lifestyle, family needs, risk tolerance, job satisfaction, financial goals, etc. Satisfaction of an entrepreneurial itch is typically not met by franchise ownership because of the operating requirements and restrictions in the Franchise Agreement and Manual, which also constrains your income potential. Most entrepreneurs want scheduling flexibility, tax advantages, no boss, net worth growth, ability to adapt business to maximize revenue, etc., which is minimal in single-unit franchising.
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This is an excellent article; it is something that I have preached for awhile on other forums. Typically, I ask people what work that they could get, and how much their investment in a bond portfolio would generate over the term of the franchise. (Fuwa constantly tells me this is a too conservative risk measure.)
But what I really like about your article is that you, with good evidence, have demonstrated how exactly how to put that in practice: what is the evidence that your $150,000 franchise will be worth $372,000 in 10 years? What have the resales been like for this franchise?
You do have to factor in what salary you will take out of each situation, but that should be easy.
Excellent article.
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Ryan,
Nice job! Great benchmark when considering an investment in a franchise.
There are some important details to consider (the devil is always in the details).
First of all consider the amount of cash invested, borrowed money should be included. The return should be on the cash invested not the total investment.
Second, a living wage, should not be included, we all must make a living, or we can hire a manger to run the franchise. If one takes out significantly more than a living wage then that should be considered as “dividends”, the above table assumes that dividends are reinvested (correct?).
Lastly, the above portfolio is diverse, but it is still invested in the financial markets, what about diversity that may include real estate, bullion, businesses, or other investments. Diversity of ones assets include a diverse group of investments other than just the financial markets.
As a benchmark for value of the business after 10 years: a business is usually (general guidelines) worth between 2-3 times EBITDA.
That would mean for a business to be worth $372K it would have be throwing off between $125K and $200K of earnings before interest, taxes, depreciation and amortization (EBITDA).
[...] post about Franchise Due Diligence at his blog about a little understood feature of this decision, The Opportunity Loss I’ve written several times that investing your $150,000 nest-egg in the public markets is an [...]