Do Franchises Make Good Investments?

Daniel Penzing
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What is a Franchise?

A business has to be a successful operation to be considered a franchise. For example, McDonald’s is a fine franchise, but if you wanted to start selling blueberry pies in your spare time, chances are you wouldn’t be able to franchise that business. If you did go through the hassle of registering a trademark, you’d run into the same problem as a McDonald’s franchise in another town.

Some franchises are free. But most franchise companies charge an up-front fee for the right to use the franchise name in your community. The franchise company also requires a continuing percentage of your business’s gross sales. The two most common fees are royalties of 4% to 6% and territories of 5% to 10%. In some cases, a franchise company will give you a break on the up-front fee if you commit to a high territory percentage.

Franchises – Part Investment, Part Business Venture

What is a franchise? Regardless of your definition, it’s clear that franchises are big business. For further confirmation, you don’t have to look any further than QSR Magazine, which has been analyzing retail food chain sales for the past 45 years.

Of all the companies they’ve studied in their 45th annual report, Subway is the top franchise.

As business historians consider how franchises have grown over the years, they often treat franchising as two separate habits – buying and selling franchises. When you buy a franchise, you are essentially investing in a business, selling part of that business, and also receiving support and financial aid. When you sell a franchise, you are investing in someone else’s business and potentially receiving a profit down the road.These two habits are equal in one regard – they both revolve around the franchisor and its aims.

How Much Can You Make with a Franchise?

Running a business is risky, and without careful examination, you might assume that franchising is not such a good investment so I’m not going to waste your time with advice that will likely bias you against franchising, and I’m not going to tell you that all franchises are investments worth pursuing. However, I will tell you that franchising has its own advantages even for those who invest for a return on capital.

Better Be Ready to Get Your Hands Dirty

Although it is generally understood that franchises lower the risk of business ownership, it is also important to remember that a franchise is going to require work, especially at the beginning. The corporate office will provide you with all the start-up information you need to get your franchise started in the right direction.

However, you will need to be prepared to put some sweat equity into it. Though the franchisor will help you during the transition, as more and more of the operations get turned over to the local owner, you will be on your own.

You will have to decide how the local operations will run, and how things will operate differently or the same from your corporate office. Although there will be some help from the franchisor in these decisions, you are going to have to develop the business plan, figure out how it will all come together, and get things up and running.

It will be different for every business, and in many cases, it will take a bit of trial and error before you find what works best for your franchise.

Make Sure You Understand the Costs

One of the biggest concerns for franchise businesses is cost. It can be easy to go over budget, so start your business plan with a budget that is tighter than you need.

Franchises Are NOT Passive Investments

There are some businesses where you can turn the key over to someone else and walk away. Grocery stores are not one of them even if you happen to own a physical location or a traditional grocery store. While you can’t run with the profits, you can certainly walk away with the losses.

In our experience, most franchisors are not actively involved with the day-to-day operations of most of their stores. But can you really just walk away from a company if you own it?

We believe it was Warren Buffett who said, “Success in investing doesn’t correlate with IQ once you’ve reached a certain level of competence. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

Becoming a Silent Franchise Partner – Now Your Investing

In Equipment and Funding Your Partner’s Marketing!

Over the past couple of years, the number of franchise buyers has dropped. One of the primary reasons why franchising has been avoided is because of the risk factor associated with an investment. Although you may be sold on the investment, there is too much of a financial risk involved to make it a wise purchase.

The introduction of the silent partner solution makes it easier for new buyers to make franchising an investment they can live with. Basically, you’re a franchise owner with a silent partner. The silent partner has a small stake in the company, but is still responsible for covering operating expenses. In return, they do not have to pay an upfront fee, which makes the entire transition easier.

The Ultimate Investment Payoff of a Franchise

Some things in life keep on giving. Your education can continuously enrich your life. Investing in your personal and professional development can lead to a lifetime of hard work paying off. And if you’re willing to swing for the fences, buying a business franchise could be the ultimate investment payoff.

What is the ultimate investment payoff? What is the ultimate payoff of a franchise? It’s the time, effort, energy, heartache, and money that you put into the business. Whether you purchase a pre-existing franchise opportunity or set up your own business, it can be the payoff that not only financially rewards you, but fulfills a passion in your life.

I recently had a very successful businessman who wanted to get into the franchising world. He had a strong business mind and was looking for a way to continue to grow. The original business concept he wanted to pursue was a building cleaning franchise. He had an interest in the cleaning industry, but he wasn’t sure of the details of the particular franchise opportunity yet. Whatever his decision, I felt that it was going to be a winner.

Creating a Portfolio of Franchises

If you’re pondering purchasing one or more franchises for your investments portfolio, it might be an excellent idea worth considering. There are several benefits from purchasing a franchise that you need to be aware of.

One of the biggest perks when looking to purchase a franchise is the fact that you will instantly have a proven business model. When you are the owner of a franchise, you can be assured that the business is running on good solid business practice.

When you purchase a franchise, you are also guaranteed a consistent brand when advertising. A well-known brand is often the best way to get new customers.

You also gain a solid support system from being a franchise owner. Many new franchise owners need help via marketing, office assistance, etc. These needs can be catered to by the franchisor.

If you purchase a franchise that is already in operation, you will be able to learn about the strengths of the business, along with the weaknesses, and can gain a better understanding of the market.

Another big perk that comes along with purchasing a franchise is that you are entering a market where someone else has taken the risk already. It is likely that the business is established and has developed a customer base within the local community or market area. This decreases the risk when starting a business for yourself.

The Good and the Bad of Franchises

Chances are that if you open a business, you will need more than one person to run it. Whether you need to hire a staff or outsource some tasks, you need more than just you in the picture. Since you will be the one who brought everyone together, you may think that this makes you the best person to do the hiring and vetting. But is that really such a great idea?

The Pros Â‍â‍

First off, as the owner of a business that is not yet fully established, you will have a lot on your plate. Running the business can be hard, and you will need to be able to do the following things at the same time:

  • Hire, vet, and contact suppliers
  • Design, vet, and contact contractors
  • Order the necessary items and equipment

You will also have to do the design and maintenance of the website, attend trade fairs, and network within your industry or niche.

Even for someone who is doing it all for the first time, this is a lot of work.

Do Franchises Make Good Investments?

When you think of franchises, you probably think of fast food companies. However, franchises come in all shapes and sizes, and you just might be able to make money with one, even if it’s not what you’re used to.

Franchises Increase in Value

You might think buying a franchise would increase the value of your company on paper, but not necessarily. Instead, you can set up a franchise to decrease your company’s value. Not all franchise systems are well drafted and well-thought-out, and some will give you some responsibility without providing you a lot of help and support.

If you buy a franchise and don’t feel like you’re getting the support you need, you have a lot less to lose if your business fails compared to if you started your own business. In fact, buying an existing business can actually bring in more income. Since you aren’t paying for more office space and more equipment, you can actually make money while you’re still learning.

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