By Grant Bullington
There are always new franchise opportunities coming and, as a result, it leads to various trends.
In this article, the author will delve into a continuous trend in franchising: popularity of lower investment opportunities. There are many reasons to proceed carefully into an unproven category, or with an inexperienced franchisor.
Terms like low or high investment will mean various things to people. That said, this article looks at two investment categories: $50,000 to $100,000 and $100,000 to $200,000—inclusive of franchise fee, startup investment, and working capital.
These findings are based on the behaviours and actions of the author’s clients over the past decade. Ideally, franchisees should determine a workable budget and stay within the range. Fortunately, there are many great options to look at.
Often, a potential owner becomes enamoured with the idea of buying into a particular franchise system, only to become disillusioned when they learn the true investment requirements. After such disappointment, franchise candidates will often adjust their focus to come up with an investment they are comfortable making and will try to stick with their budget. That is not always easy to do. It usually takes a bit of research to learn the true investment required for a business.
Lower-cost franchises put the reality of business ownership within reach. Having a budget of $100,000 will provide many options for the owner to explore; however, they cannot expect many of the choices to have a front door (not the type of business one typically associates with franchising, such as food and retail). Therefore, a proprietor needs to be prepared for a slightly different search than they anticipated.
Most of the author’s clients allow their investment preferences drive their budget instead of capacity. It is very common to see franchisees opt for lower investment options as a means of limiting their exposure. Those in the U.S. tend to make bolder investments—where their franchise winds up being 50 to 60 per cent of their personal net worth. In Canada, the author generally sees people are inclined to invest between 10 and 30 per cent of their personal net worth.
In early 2019, FranNet Western Canada co-hosted an event for prospective franchise investors with one of the larger Canadian banks. The organization was fortunate to have a leading panelist in franchise heading the discussion. The speaker offered the following advice, “Do not go all-in on your first franchise. Even if we will lend it to you.”
Lower investment businesses start small in scale, but do not necessarily stay there for long. Service-based businesses would be a perfect example. These companies are usually built by adding staff or resources (like vehicles) on an as-needed basis.
Many home-service businesses start with minimal staff (like two people). When the franchise is consistently busy and at risk of turning away business, the owner typically increases the number of employees. This is the opposite of a restaurant—where a franchisee might need to have 20 to 60 people on the payroll.
Many lower-investment franchises come with a large enough territory to build a sizeable business. It might be based on population, or a number of owner-occupied households, possibly with qualifying income thresholds. For business-to-business (B2B), it is the number of eligible clients/customers in a region. Many franchisors allow franchisees to commit to multiple territories upon signing or provide the option to expand later. However, a potential owner should stay within their budget.
Franchisees should not wait for customers to find them. An owner can engage in activities to spread the word about their business and build topline revenue. The key is that the owner is in the driver’s seat. A proprietor can use networking as a way to build awareness and there are many meet-and-greet opportunities.
Marketing activities are aimed to get the business’s phone to ring. A certain percentage of those conversations will convert to sales. Growth can be attributed to owners who consistently sell. Franchisees who treat the customers right will experience client retention. Add staff to service the company’s ever-expanding customer base. When a prospective owner is validating with franchisees, they commonly learn that proprietors in the same concept may have a wide range of employees on payroll—perhaps 15, and as many as 40. Companies with a lower number of employees can be just as content as those with a larger staff, as they are able to scale a business that aligns with their individual goals.
Products and services offered through lower-investment opportunities can have attractive gross margins. With the absence of a storefront, staff payroll is often the largest line item expense in lower investment businesses. Franchisees have hired the staff to deliver products and services to customers, so it is an entirely justified line item. Franchisors have developed their system to be as lean and efficient as possible.
Role of the owner
A franchisee in a lower-cost business can expect to wear a lot of hats, as they are responsible for a wide range of activities. This can include sales and marketing, customer service; hiring, team, and general trade management; ordering, and procurement.
ROI versus ROE
There is no automatic correlation between the investment a franchisee makes and the potential return. The formula should be perceived as a return on equity (ROE), instead of return on investment (ROI). Franchisees should consider the risk of time, energy, or hard-earned dollars. It is a very different proposition than a café where one invests $400,000.
The worst ‘what-if’ scenario
As part of due diligence, the author recommends his clients to be aware of and fully understand the fall-out of a worst-case scenario, ideally, once they are finished with financial forecasting.
The trend of lower-investment businesses 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 sizeable investments, as well as those who want to start small in a business, which does not pose a risk to cause serious financial damage. Thankfully, there are many great options to explore. Finding them will be different than one might expect—they are hidden, compared to highly visible retail. A potential owner’s approach to researching will be different. The author advises franchisees should focus on their role as an owner.
Grant Bullington is a Vancouver-based franchising consultant with FranNet Western Canada, helping prospective franchisee clients determine their ideal type of business, providing optimal matches, and assisting their research at no cost. For more information, visit www.frannet.com.