Calculating the risk of a franchise investment

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(FORTUNE Small Business) -- Dear FSB: I am looking to invest $25,000 in a small fast-food restaurant franchise. According to the EBITDA over five years my initial membership interest and initial sharing ratio is only 3.05%. Is this a common practice?

- Ray, New York City

Dear Ray: There is no specific correlation between EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and sharing ratio, says Bruce Schaeffer of New York City-based Franchise Valuations.

"They don't relate," Schaeffer says. "That's like saying, 'if I had an orange grove how many apples would I get?'"

Instead, consider what your projected rate of return might be on your $25,000 investment. Compare that to what you think your risk will be, and work out the risk-reward ratio to help evaluate whether to invest.

Should the value of the enterprise be roughly $800,000, then an investment of $25,000 (about 3%) is roughly proportional to your outlay, Schaeffer says.

"But there's no rule of thumb or simple answer," Schaeffer says. "You could be talking anything - a Subway doing $600,000 a year or a McDonald (MCD, Fortune 500)'s doing $6 million a year."

In other words, it all depends, especially with a franchise.

Franchise consultant Nick Bibby of the Shreveport, La.-based Bibby Groupsays you'll need to get even more detailed in your analysis.

"Generalities are just not allowed in franchising," Bibby says. "That's a big mistake. It's all very, very specific."

How to approach evaluating such an investment will depend on a number of factors, such as: is the restaurant an existing operation or new franchise?

If the restaurant in question is an existing Burger King (BKC), for example, a CPA will be able to examine income records for that location and perform a simple business analysis.

If your opportunity involves establishing a new restaurant, you'll likely need the services of a franchise attorney or evaluations expert. Special consideration should be paid to the performance of the franchise company as a whole.

"The only clear route is to consult a CPA or evaluations person," Bibby says.