Franchise ownership can be an excellent investment opportunity and a way to round out your stock portfolio. Today, many large private equity groups are building franchise portfolios, which has influenced smaller investors to follow suit. Franchises also present the opportunity to run your own business by following a tried-and-true model.
A franchise is an investment that’s in your control more than other types of investments. This is what sets them apart from stocks, bonds, and even real estate. You have greater influence over how well your investment does. If you want a combination investment portfolio with both passive and active investments, adding a franchise can be a great addition.
Pros of Franchise Ownership
There are a number of benefits to investing in a franchise. Most of the perks revolve around running your own business. If you’ve always had entrepreneurial dreams, a franchise could be the safest bet.
You Can Decide How Much to Invest in a Franchise
You’ll meet with your financial advisor to determine how much you should invest. Together, you’ll consider the capital you’ll need at the beginning, since it’s unlikely that your business will be profitable from the moment you open the doors. Then, you can find a franchise opportunity that meets the amount you want to invest and will give you the ROI you expect.
Options Span All Industries
There are a number of franchise types to choose from across a number of industries:
- Beauty salons and spas
- Education and day care
- Health and fitness
- Pet services
For larger franchise businesses, like restaurants or hotels, consider partnering with other investors to run the business together.
Franchises Already Have Demonstrated Success
You’ll be in a better position to compete with privately owned businesses that don’t have the track record and brand recognition your franchise has. You’ll also be given the training and tools you need to make your franchise successful. There’s less risk than if you were to build a business from the ground up.
Cons of Franchise Ownership
Even with all of the benefits of owning a franchise, there are some drawbacks to consider. From high cost to lack of control, owning a franchise may not offer the flexibility entrepreneurs are seeking.
You’ll need a lot of startup capital to get going. The initial franchise fee can be several thousand dollars. According to U.S. News, the franchise fee to purchase a Subway branch is $15,000, which is on the lower end of franchise fees. However, total investment can be as much as $263,000. Knowing what’s included with the franchise fee will help you determine what else to budget for.
Franchises Are Not Passive Investments
You’re buying a business, and you’ll need to be active and present. You’ll be the leader of your franchise. You’ll have to devote a minimum of 15 hours per week to the franchise, assuming you hire a manager you trust. It’s more likely that you’ll have to be present full-time, especially in the beginning.
Royalties Can Be High
As you run the franchise, you’ll have to pay royalties to the legal franchise owner in order to continue using their assets. Since you’re the one on the ground working every day, it can be difficult to wrap your head around paying someone else. You may prefer a business model that incurs fewer fees.
You Won’t Have Much Control
If you want a total entrepreneurial experience, you may find that franchises are too controlling. For example, you can’t create new products or come up with your own marketing campaigns. You’ll have to follow their guidelines, which means you can’t apply your creative thinking as often as you may want.
Choosing the Right Franchise
Choosing a franchise requires you to be 100 percent honest with yourself. What do you want to achieve? What are your reasons behind buying a franchise? Do you want to be front and center, or would you like someone else to manage the business for you? Answering these questions will help you choose the perfect franchise from the beginning.
Think About What You’re Good At
Go over your past professional experience and think about the things you’ve enjoyed doing and where you’ve excelled. If you’re great with customer service and face-to-face interactions, you may want to open a franchise in the hospitality industry. If you prefer to manage people from behind the scenes, you’ll want a franchise opportunity that lets you hire a team.
Decide What You Want to Accomplish
The franchise you choose should match up with your goals. Otherwise, you could get stuck with a business that requires more management than you’re able to commit or that can’t scale the way you want it to. Are you buying the franchise as a side gig or hobby, or do you want to act as a full-time business owner? Is this going to be your only source of income? Do you want to purchase additional franchises in the future?
How Comfortable Are You With Risk?
Like other investments, there are some franchises that are riskier than others. Long-standing, well-established companies often have less risk, but if they’re not providing cutting-edge products or services, you may hit a glass ceiling. Newer companies have a higher risk of failure, but if they do succeed, they could result in higher profit margins.
Determine How Long You Want to Own the Franchise
You should know from the beginning how long you plan on running your franchise. Some franchises restrict when and if you can sell to other franchisors. If you want to invest in something that you can pass down to your children, you’ll have to check out the franchise’s regulations before making your choice.
Franchise Management and Liability Considerations
Finding the franchise opportunity that’s right for your budget, interests, and time availability takes a lot of research. There are legal considerations as well — some that are beneficial and others that will cost you more.
The initial franchise fee is tax deductible, as it’s considered a startup cost. If you’d like, you can gradually write off the deduction for a span of 15 years, regardless of how long your franchise contract is. You may also be able to deduct expenses for training and travel.
Protect your business and building with business property insurance. This will also protect your business’ personal property, like the equipment and furniture you use. Should you have to suspend business for a period of time, insurance can also cover lost income.
Should you have to bring a lawsuit against an individual or another company, such as in the event of a personal injury, consider litigation financing. This is different from a cash advance because the funding can only be used for legal fees. This is a helpful alternative to traditional funding if you don’t need help paying your personal or business bills and only want funding for the legal services themselves.
For investors who want to be active participants in their investment, a franchise may be the perfect option. You’ll have more control and ownership than with other types of investments, and you’ll have the power to make decisions in order to get a higher ROI in the future. If you don’t want to be responsible for a physical store, there are also several electronic franchises that you can invest in. Regardless of your approach, becoming a franchisee is a smart investment — as long as you weigh the pros and cons, then select the franchise opportunity that is right for you.
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