By Grant Bullington
There are always new franchise opportunities coming and hence this leads to various trends.
In this article, the author will look at an ongoing trend in franchising: the popularity of weaker investment opportunities. There are many reasons to proceed cautiously in an unproven category, or with an inexperienced franchisor.
Terms like low or high investment will mean various things to people. That said, this article examines two categories of investment: $ 50,000 to $ 100,000 and $ 100,000 to $ 200,000, including franchise fees, start-up investment, and working capital.
These results are based on the behaviors and actions of the author’s clients over the past decade. Ideally, franchisees should determine an achievable budget and stay within the range. Fortunately, there are many great options to consider.
Often times, a potential owner falls in love with the idea of buying into a particular franchise system, only to become disillusioned when learning the true investment requirements. After such a disappointment, franchise applicants will often adjust their focus to find an investment they are comfortable making and try to stay on budget. It is not always easy to do. It usually takes a little research to find out the real investment required for a business.
Lower cost franchises put the reality of business ownership at your fingertips. Having a budget of $ 100,000 will provide many options for the owner to explore; however, they can’t expect most choices to have a front door (not the type of business one typically associates with franchising, like food and retail). Therefore, an owner should be prepared for a slightly different search than he anticipated.
Most of the author’s clients allow their investment preferences to drive their budget rather than their capacity. It is very common to see franchisees opt for lower investment options in order to limit their exposure. In the United States, investors tend to make bolder investments, where their franchise accounts for 50-60% of their personal net worth. In Canada, the author generally finds that people are inclined to invest between 10 and 30 percent of their personal net worth.
In early 2019, FranNet Western Canada co-hosted an event for potential franchise investors with one of Canada’s largest banks. The organization was fortunate to have a leading franchise panelist leading the discussion. The speaker gave the following advice: “Don’t go all-in on your first franchise. Even if we lend it to you.
Low-investment businesses start small, but don’t necessarily stay there for long. Service companies would be a perfect example. These businesses are usually created by adding staff or resources (such as vehicles) as needed.
Many home service businesses start with minimal staff (like two people). When the franchise is constantly busy and at risk of turning down business, the owner usually increases the number of employees. It’s the opposite of a restaurant, where a franchisee may need to have 20 to 60 people on the payroll.
Many low-investment franchises have a large enough territory to build a large business. It can be based on population or on a number of owner-occupied households, possibly with qualifying income thresholds. For business-to-business (B2B), this is the number of eligible clients / clients in a region. Many franchisors allow franchisees to engage in multiple territories when signing up or offer the possibility of expanding later. However, a potential owner must stick to their budget.
Franchisees don’t have to wait for customers to find them. An owner can engage in activities to market their business and generate income. The key is that the owner is in the driver’s seat. An owner can use networking as a way to market themselves and there are plenty of opportunities to meet.
Marketing activities are aimed at making the company’s phone ring. A certain percentage of those conversations will turn into sales. The growth can be attributed to owners who sell regularly. Franchisees who treat customers well will experience customer retention. Add staff to serve the company’s ever-expanding customer base. When a potential owner validates with franchisees, he usually learns that like-minded owners can have a wide range of employees on the payroll – maybe 15 and up to 40. Businesses with fewer payroll numbers. Employees can be just as satisfied as those with a larger workforce because they are able to grow a business that matches their individual goals.
Products and services offered under lower investment opportunities may have attractive gross margins. In the absence of a storefront, staff payroll is often the most important expense in low-investment companies. Franchisees have hired staff to provide products and services to customers, so this is a very valid line item. Franchisors have developed their system to be as simple and efficient as possible.
Role of the owner
A franchisee in a lower cost business can expect to wear a lot of hats because he is responsible for a wide range of activities. This can include sales and marketing, customer service; recruitment, team management and general business management; ordering and supply.
ROI vs. ROE
There is no automatic correlation between a franchisee’s investment and potential return. The formula should be seen as a return on equity (ROE), instead of a return on investment (ROI). Franchisees should consider the risk of time, energy or hard-earned money. This is a very different proposition from a café where you invest $ 400,000.
The worst case scenario “what if”
As part of due diligence, the author recommends that clients be aware and fully understand the consequences of a worst-case scenario, ideally once they have completed their financial forecast.
The trend for low-investment companies is not based on the need to be in a hot, flashy category. Instead, it is the result of people who cannot or prefer not to make large investments, as well as those who want to start a business small, which does not pose a risk of causing serious damage. financial. Fortunately, there are many great options to explore. Finding them will be different than you might expect: they are hidden, compared to highly visible retail. A potential owner’s approach to research will be different. The author advises franchisees to focus on their role as owner.
Grant Bullington is a Vancouver-based franchise consultant for FranNet Western Canada, helping potential franchise clients determine their ideal type of business, providing optimal matches and assisting with their research at no cost. For more information, visit www.frannet.com.