 Investment Feasibility
Thinking of buying a franchise? How much should you spend?? Or even buying a business how much should I pay for profit. What is a good rule of thumb?
This is usually measured by sales to investment ratio that is how many dollars of annual sales can you reasonably expect a proposed business to generate for every dollar of invested capital it will take to open it.
The Sales to investment Ratio is calculated by taking the projected annual sales of a proposed business and dividing it by the total projected investment required to open it and get it operational.
In the restaurant business success or failure hinges almost entirely on “Sales.”
The cost that you are trying to evaluate is the rate of risk or how long it will take to recoup the initial investment. The Cost of profit can be evaluated in the same manner, if paying for profit, as a rule of thumb I allow for 3 years, at about 5%-10% margins, I would also look at recouping my investment at around 4 to 5 years.
To evaluate this you need to understand a number of “Ratio’s”.
If you allow a net return of app 7% -10% on turnover you can evaluate how long it will take to recoup your investment. e.g.
If the start up capital of a restaurant is $250,000 and the turnover of the business is $624000, per yr or ($12000 a week) then your sales to investment ratio is 2.5 or in other words it would take 5.72 years to recoup your initial investment. This is too long in the hospitality environment.
However if the turnover per week was $18,000 or an annual turnover of $936,000 then to recoup the investment of $250000 would take 3.82 years, This is more satisfactory in the environment.
i.e. $936000 x 7% = $65,520. Divide the initial $250000 investment by $65,520 and you have 3.82 years to recoup investment, a better scenario.
The prices that some businesses have been asking are in some circumstances not relevant to the turnover or margins they have been achieving. Usually this is an attempt to recoup their OVERCAPITALIZATION with their initial investment.
There are two templates available for subscribers (one for a Table Service Restaurant, one for a Quick Service Restaurant)
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