By Joel Bissitt.
Franchises as an Investment: Risks, Rewards and Returns
Investing in a franchise can be a very lucrative investment opportunity, but it can come with a hefty initial investment cost. On the other hand, franchises can prove to be fantastic investments for people who want to become business owners without having to reinvent the wheel with an entirely new concept. A franchise allows a franchisee to run a business which trades under an already-established brand name with a strong brand identity.
It will also provide a new investor with access to a clear day-to-day business operational manual to follow, extensive training and access to a continuous support network if ever required after the initial training and investment phase. However, like any investment, franchises do involve both potential rewards and significant potential risks if not operated correctly.
What a Franchise Investment Is Explained
A franchise investment involves purchasing the rights to operate a business using an established company's brand, products and operating model. The initial investment can include a franchise fee, equipment, premises, stock, marketing costs and working capital. In addition to these upfront expenses, franchisees may need to pay ongoing royalties or contribute to national and local marketing activities. The total cost varies considerably depending on the industry, location and size of the business.
New investors are particularly attracted to a franchise investment because of their extensive support and training and sophisticated operational procedure process manuals. New franchisees can expect to receive training, operational guidance, assistance with marketing strategies and access to established suppliers to keep the business up and running.
This structure alone can help remediate many of the introductory risks and uncertainties associated with traditional entrepreneurship. Piggybacking from a brand with an already-established and strong overall brand identity will also assist in getting customers through the door much quicker than starting an entirely new brand from scratch.
The Risks and Challenges To Franchise Investments
Although franchises do come with many perks as an investment opportunity, they are not without potential risks and challenges. As a franchisee, you will remain responsible for managing daily operations, business budgeting, recruiting employees and maintaining customer satisfaction. There are also other potential risks to franchises, such as poor management or even unfavorable market conditions in your franchise businesses chosen niche can affect potential profitability and business growth, even when the wider brand is nationally or even internationally, depending on whether the franchise is a success.
Another important thing to consider before becoming a franchisee is also your contractual dependence with a franchise as opposed to starting your own company. As franchisees generally have to follow the franchisor's rules regarding branding, products or services you can provide, product pricing, suppliers and the businesses day-to-day operational procedures.
This could feel like a significant limit to your freedom, especially if you are interested in being a more creative entrepreneur, then franchise ownership is not for you. These are more critical reasons for the importance of reviewing the franchise agreement carefully and even seeking a second opinion where needed on anything from professionals.
The Rewards and Potential Upside To Franchise Investments
A franchise investment has many rewards and potential for investment upside as it comes with an established brand with existing brand visibility and the possibility of generating a long-term income. A well-managed franchise in a highly populated location will attract a loyal customer base and produce attractive returns over time, which will also strongly increase your franchises market value in your local area for the future if your exit plan is ever to list it with your franchisors' approval as a franchise resale.
However, please remember that potential returns depend on several aspects of how the business is run and should not be assumed to be guaranteed just as the business is a franchise. Potential franchise investors need to consider franchise financial forecasts, ongoing operational expenditures, potential franchise loan repayments, taxes and the time required to reach the break-even point of the business.
Would a Franchise Be The Right Choice For You?
Franchises as an investment can offer a more accessible path to successful business ownership as they do have, in general, higher success rates than traditional startups, but at the same time, it requires a substantial initial financial commitment to cover the franchise costs, careful management and acceptance of contractual restrictions, which in return will limit your creativity over some business decisions.
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