Evaluating Franchise Investment Opportunities using Probability-Tree Analysis

Abstract

A franchise investment opportunity is normally evaluated by the prospective investor in terms of financial ratio analysis, simple break-even analysis, and cash and capital budget analysis of average sales and profit figures or ranges provided by the franchising organization. In addition to this basic evaluation of the venture, a prospective investor can, using a probability-tree analysis, take into account the probabilities of occurrence of various profit levels based on his subjective judgment ratings of proposed locations and of proposed managerial ability. Such an analysis allows the franchise investor to gain maximum decision-making information from available sales and profit data.