Do you have the urge to be your own boss? Are you looking for multiple streams of income to help fund your retirement? Locally owned franchises are an alternative small business model with 733,000 establishments across the country, according to the International Franchise Association. However, franchises are a distinct type of investment, and it’s wise for investors to look before they leap.
Here are three questions to ask yourself if you think you might want to invest in a franchise.
1. Are you an entrepreneur who wants to do things your own way?
If the answer is yes, a franchise may not be the answer for you. When you purchase a franchise, you are essentially licensing a specific business model. You will be contractually required to implement the business model in a specific way. Are you willing to follow the prescribed system? The other side of the coin is that a franchisee will have plenty of support in setting up the business, including site selection, financing, training, advertising procedures, operational assistance, and access to bulk purchasing.
2. Do you have sufficient start-up capital?
Depending on the type of franchise, start-up costs can be significant. Not only will there be a franchise fee, but the investor will also need enough start-up working capital to support the business until it becomes profitable. Many franchise fees range from $15,000 to $50,000, and may or may not include the cost of training. For example, the fee for opening a Mosquito Joe abatement franchise is $25,000. But a typical total investment to open a Mosquito Joe is estimated at $94,500.
Entrepreneur Magazine compiled a list of the low-cost franchises that can be started for under $60,000. Included on that list are companies like RE/MAX LLC real estate, Cruise Planners travel agency, and Vanguard Cleaning Systems, a commercial cleaning company. Be sure to read the fine print closely to determine exactly what you will get for your franchise fee.
3. What are the economic prospects for the franchise? Is it recession proof?
Consider the current and future environment for the franchise’s products or services. Technology is disrupting many traditional business models. One sector that is showing growth is senior care, which benefits from the aging baby boomer population in the U.S. Over the past three years, the senior-home-care sector has grown by 6.6% annually. That's faster than the overall franchise industry’s 2.6% compound annual growth rate, says market researcher FRANdata.
As with any investment, let the buyer beware. Not all franchises are created equal. A potential investor will need to do his or her due diligence, and would be wise to consult an experienced attorney before signing on the dotted line. Scour the FDD—the franchise disclosure document—closely to gain insight into potential profitability, as well as any additional fees that could be involved.
A franchise may offer some shortcuts and additional support if you want to start your own business. But at the end of the day, you must determine if it’s the right fit for you.
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