Many years ago I looked at buying a Donut King Franchise from Retail Food Group. Looking at the numbers for a $400,000 business you could expect to get around $120,000 per year income assuming both yourself and your wife worked in it. This also assumed working long hours so earning a low hourly rate.
However back then there was a payoff which was after a number of years you would sell your business for a higher price than you would buy it for as there was a much higher inflation rate, ie the price of a cup of coffee and/or donut was increasing so the value of your business at least in nominal terms was increasing without needing to do anything else.
So if you held your business for lets say 7 years you could expect to sell it for $600,000 and back then you could buy a house in the suburbs for around $150,000.
That is the value of the business worked liked residential real estate where your would get a low yield but high capital gain.
In a high inflation world the retail food group franchise model works well however inflation has fallen away to around 2 percent for many years meaning the value of these businesses are not increasing at least in nominal terms.
I would not like to own one of these businesses in a low inflation world without a lot more concessions from the franchisor where the fees are a lot lower and the income is higher to compensate for the lack of capital growth.
As for the internet taking away customers from a mall I would assume that ultimately this would be reflected in lower rents charged by the landlord as otherwise these businesses (or any business) will become unsustainable.
RFG Price at posting:
$1.98 Sentiment: None Disclosure: Not Held
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