The COVID-19 pandemic has changed the way the world lives, works, and does business. One of the most dramatic effects is the millions of people who find themselves without a job due to mass corporate layoffs. Many of these displaced workers find themselves considering franchise ownership as an alternative to return to the workforce. Investing in a franchise is a great option for those looking to take control of their financial future. Franchises are typically low cost-of-entry with turnkey operations, and depending on the franchisor, provide extensive training and resources for franchisees. However, when it comes to franchises, not all opportunities are created equal. What should future franchise owners consider when researching franchises to invest in? The International Franchise Professionals Group (IFPG) provides common questions, advice and insights to these frequently asked questions on investing in cheap franchises after corporate layoffs.
What Are The Best Low-Cost Franchise Opportunities?
The type of franchisor, industry, and geography of the opportunity will determine the cost of the franchise. Generally, however, the most advantageous franchises are ones that cost less than $40,000 including initial training, setup, and operating costs. Many franchisees opt for lower entry cost franchise opportunities under $25,000. Businesses under this category include home-service and retail amenities that do not require a large infrastructure and have a proven track record of success.
What Are The Benefits of Investing in a Cheaper Franchise?
When it comes to cheaper franchise investments, the key benefit is cost. It’s one of the most immediate advantages for entrepreneurs wanting to get started without having to invest a large amount of capital. Cheaper franchises typically offer the same features and benefits of larger franchise opportunities including resources and materials, training and support systems, marketing support, and a uniform system complete with branding and logo usage. While cheaper franchise opportunities offer lower cost up-front and no royalties, they generally require more dedication and hard work to ensure success.
What Qualities Should I Look for When Thinking of Investing In a Cheap Franchise?
When researching different opportunities, there are several qualities to look for. Start by looking at the company’s financials and business model, as well as the competition. Consider the franchisor’s support system and what resources and materials are provided. Additionally, investigate the available marketing tools, the expected royalty fees, and the success stories from other franchisees. Ensure you understand the company valuation, ownership structure, and any potential legal implications.
What Kinds of Profits Are Realistically Expect From a Lower Cost Franchise?
The estimated profits will again depend on many factors, primarily the franchise’s business model and location. However, profit margins operate in the 10-15% range for many lower cost franchise opportunities. Profitability is heavily reliant on an effective marketing strategy and proper management of costs and overhead. Additionally, franchisees should expect start-up costs to be higher than those of traditional small business start-ups, as franchises require fees collected by franchisors to cover training, marketing, and most likely location search costs.
Are There Federal or State Benefits I Can Take Advantage Of When Investing In a Franchise?
There are a variety of tax deductions and credits that can be taken advantage of when entering into the franchising business. These state or federal benefits vary and can be researched through the local and state agencies. Additionally, the Small Business Administration (SBA) offers loan programs that provide financial assistance to future franchisees. SBA loans may also have the option of deferring principal payments for up to two years, helping to keep the franchise funded and operating during the initial months.
What Do I Need To Know About The Business Valuation Of Franchises?
When it comes to the business valuation of a franchise, it’s important to consider all of the following factors:
- The business model and concept of the franchise
- The franchise’s performance and success in the marketplace
- The qualifications and integrity of the franchisor
- The reputation and customers’ trust in the franchisor
- The franchisor’s financial condition, ownership, and support capability
The value of a franchise will be determined by the actual performance of the business, not just the financials. Reviewing one or more years of financials will give a general idea of the value, however, the valuation of a franchise should include Intangible factors such as the quality of company’s leadership and support, the presence of the company in the marketplace, and customer loyalty.
What Considerations And Due Diligence Should I Take Before Investing In A Franchise?
When investing in a franchise, it is important to do the necessary due diligence and address all of your questions and concerns. Consider the following steps:
- Conduct preliminary research on the franchisor, its performance in the marketplace, and its customer feedback
- Read the Franchise Disclosure Document (FDD) and understand the franchisor’s product and services, financials, and ongoing obligations
- Ask franchisees about their experiences with the franchisor
- Contact the local Small Business Administration (SBA) to inquire if there are any unique funding programs
- Consider financing options, such as the SBA 7(a) loan program, which offers incentives such as principal deferment and assistance with getting qualified
Investing in a franchise is an exciting and rewarding experience. Researching and understanding the franchisor and the required obligations are key to a successful and profitable investment.