Without a doubt the single most common and completely avoidable mistake I see all the…
Bigger Isn’t Always Better: What’s Your Business’s ROI?
On a drive to the beach recently, my husband and I were discussing which coffee shop to go to and it got me thinking about return on investment (ROI). One is a large national franchise, the other a small independent local operator.
The franchise is around 120m2 and the independent around 75-80m2 in area. There is no doubt, even by observation, that the franchise has a much higher turnover, but which one has the highest net profit? And which one has the better ROI?
I don’t know enough about either of these businesses to be able to answer that. But, from my 30 years shopping centre management experience in 3 states, I have seen enough Small Businesses successes and failures to feel confident to share with you my thoughts and observations about how you can improve your net profit and ultimately attract a much higher selling price for your business by focussing on 3 types of ROI.
1. Capital ROI
The franchisee most likely paid between $350 and $750k to set up his/her franchise (in some cases much more). Yes, this most often includes fitout costs, franchisee and staff training, an initial marketing budget and many other incentives designed to help the franchisee succeed.
The independent operator probably set up his/her business for under $200k.
Your own accountant will guide you on what is a reasonable ROI for your capital, but my thoughts are that you should aim to return at least double what you’d earn if you left your money in the bank, in your superannuation or in that commercial or residential property investment.
2. Time ROI – Time is worth money
The franchised operator is more likely to be structured to work less ‘in the business’ and more ‘on the business’, nevertheless, the time spent ‘on the business’ must be counted as time.
The independent operator is more likely to be working ‘in the business’ physically working onsite every day and working ‘on the business’ every other waking hour. The time that he/she works in and on the business, must be counted.
Each person will have a different way of calculating this. At the very least you should expect an ROI that matches what you would have earned on wages, including overtime rates.
You laugh at me? Very few businesses achieve this. Which is why many don’t make it through, or they sell their business at a substantial loss instead of a healthy profit. Business owners become burnt out, frustrated and feel completely debilitated from trying so hard. Which brings me to the third ROI type.
3. Risk ROI
Statistics for Small Business failure are widely documented. There is a much higher risk of failure than success. A ‘Risk ROI’ must be factored in when evaluating a new or re-evaluating an existing business.
How do you calculate the Risk ROI? The higher the risk, the higher the ROI. I believe the Risk ROI should be at least equivalent to the Capital ROI. You want to gain a higher Capital ROI than what you’d earn with less effort leaving your dollars elsewhere PLUS a higher return for the time you’ve invested and the risk you are taking. Otherwise, why do it?
4. Sanity ROI
And here’s the fourth ROI, arguably the most important – a Sanity ROI. If you feel your sanity is at risk continuing to work for someone else and you see no other alternative than to get out and be your own boss, then a Sanity ROI should also be factored in when calculating the value to you.
Equally if you are already in business and feel that your sanity and your health, are at risk to continue to strive for greater ROI’s, you may have little choice but to lower your expected return.
Either way, look at your options through clear lenses before stepping in the proverbial manure.
Like my thinking? I’d love to offer a free 30 minute discovery session to help you use my method to calculate the ROI on a business you are thinking of buying or already own. Click here to register your interest and complete the preliminary questionnaire.
By taking 15 – 20 minutes to complete these questions, I can help you have a solid understanding of where you are currently at, and there’s absolutely no obligation. Imagine what that could be worth to you, if only to have another opinion other than your accountants and your real estate agents.
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
SHARE THIS ARTICLE WITH LIKE MINDED SMALL BUSINESS PEOPLE