Investing in Investment Franchises

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By Dzhingarov

Every franchise purchase serves an economic goal; whether that means replacing or supplementing income, creating legacy wealth, or creating generational wealth. Active investment franchises typically help achieve these aims successfully.

An investment franchise is a large-scale operation requiring significant funds. Usually managed by professional teams, its operation can involve complex processes.

The Initial Investment

Franchise owners are investors; any person or entity who invests capital with the expectation of financial returns (Investopedia). While initial investments for franchises can be substantial, their lower startup costs than independent businesses make financing your purchase possible using personal savings, borrowing from family and friends, mortgaging your home mortgage loans or taking out an SBA business loans possible.

One of the best ways to learn about an initial investment for any franchise opportunity is speaking with current and former franchisees. They can help evaluate a franchisor’s FDD, understand earnings projections based on assumptions used, and assess whether an opportunity meets your investment resources and goals.

Job franchises may also be an option, and can provide those looking for less of a hands-on approach an opportunity to invest money and hire professional management teams to operate the franchise. This type of franchising is popularly found within hospitality industries such as hotels as well as retail or fitness brands.

Another option is to take a close look at an existing operation in your area, which will give an accurate picture of what sort of investment will be necessary to start up and operate a franchise business in that location. Furthermore, taking this route allows you to see how well an established operation is performing and what kind of earnings may be anticipated from this strategy.

As for ongoing expenses, they’ll vary significantly depending on the franchise you select. While payroll, utilities, rent/mortgage payments and rent/mortgage will likely be your major expenditures, marketing/advertising/maintenance and repairs may also need to be factored in.

Franchise investments can be an excellent way to diversify your portfolio and increase the odds of success, but they may not be suitable for everyone. Initial investments may pose an entry barrier; even if you hire a manager to oversee operations on your behalf, chances are good you’ll still need to be present each day as the manager might require daily oversight by you as the investor.

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The Management Fee

Franchises combine investing with business operations; investors provide initial capital while the franchisee runs day-to-day operations. However, this unique arrangement requires extensive time commitment. Franchisees generally won’t see a return right away so patience and an entrepreneurial spirit are necessary in making the business work; franchisees must also adhere to rules set forth by their franchisor.

The management fee associated with an investment franchise varies based on both initial investment size and level of assistance provided by its franchisor in setting up their business. It may include legal, accounting and equipment costs in addition to ongoing services like training, marketing and systems implementation.

Considerations should also be given to ongoing royalties, which are calculated as a percentage of gross sales and cover the ongoing support services from your franchisor. It’s vital that you fully understand how these royalties could impact your bottom line before making a final decision.

Many franchisors also require contributions to regional or national marketing campaigns, which aim to raise brand awareness and, hopefully, boost individual location sales. Some franchisees may question whether these campaigns have any real effect on local sales; otherwise they could question their effectiveness altogether.

Certain franchises charge technology and training fees to provide their franchisees with all of the tools necessary for running their businesses effectively. While this investment can help maintain brand standards and optimize operational processes, it may prove costly if franchisees lack sufficient funds.

Aspiring franchisees must satisfy certain liquid capital and net worth criteria in order to qualify as investors in franchisees. Funds may be raised using savings, mortgaging homes, bank loans or angel investors – many financial advisors specialize in dealing with franchisees can assist with creating realistic budgets. Before investing in any franchise opportunity it is always prudent to read their FDDs as well as speak with current and former franchisees to gain more information and build an informed opinion about it.

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The Marketing Budget

A franchise’s marketing budget depends on its growth goals. If the brand plans on growing gradually, marketing expenses may be reduced significantly; otherwise, rapid expansion may require spending more on ads; in addition to traditional media tactics like newspaper and radio ads, franchisors may invest in social media campaigns and pay-per-click (PPC) ads as well.

Setting realistic marketing campaign goals for any franchise is vitally important, taking into account multiple aspects such as revenue generation and market potential, cost of advertising placement, special event costs or promotions and any special promotions planned out well ahead.

Franchisees need access to data and analysis in order to make informed decisions about their marketing campaigns, so as to evaluate their efforts’ success and adjust as necessary. It is also essential that franchises understand the return on investment (ROI) for each campaign in order to inform their strategy and budgeting needs.

One way of measuring ROI is by looking at the total amount spent on each campaign and then calculating average cost per sale based on sales generated during that campaign, giving franchisees an idea of how much each sale is worth and helping them create an accurate budget plan for their business.

Location can also impact a franchise marketing budget. Each region has different demands for marketing services and competition levels; larger agencies can charge premium fees, attracting higher profile clients while simultaneously increasing income for their owners.

To maximize their franchise marketing budget, franchisees should create effective strategies for both attracting new customers and keeping existing ones. This can be achieved using strategies tailored specifically towards their target audience as well as monitoring key performance indicators. It is also essential that all members of their corporate team agree on budgets and goals.

The Operations Budget

Before investing in a franchise, it is vital to carefully consider all associated costs and fees. Although these expenses may seem intimidating at first, they should be seen as an investment into your financial security and future success. Investing in a franchise has the potential of offering substantial returns on initial investments as well as increasing revenue and profits significantly.

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Your operational budget should include, in addition to initial start-up fees and marketing costs from your franchisor:

  • Staffing and Labor Costs – This expense covers the costs associated with hiring and managing front and backhouse staff that reflect brand ethos and service standards, in terms of payroll, insurance premiums and any necessary employee related expenses. Payment Processing Fees are another often forgotten expense that covers fees related to accepting credit/debit card transactions from customers.
  • Software Tools and Systems – Your franchisor may provide proprietary software or other systems that streamline day-to-day business operations, increasing efficiency while decreasing errors and margins of error. This can save both time and money as well as decrease human capital requirements for the business.
  • Support – Franchisors typically provide comprehensive training and support services for their franchisees, offering guidance from day-to-day operations to market research. This can help your new business navigate smoothly while mitigating risk while optimizing return on investment.
  • Advertising and Marketing – Franchisors typically conduct nationwide and local advertising campaigns that increase brand visibility and customer engagement, offering an effective means of building brand recognition while giving your franchisee an edge against independent businesses in your locality. This practice serves to strengthen competitive advantages over independent businesses in your market place.

Franchise investment may offer significant returns; however, not everyone should pursue it as an option. Before making your final decision, be sure to thoroughly read and assess the Franchise Disclosure Document as well as evaluate your personal strengths, weaknesses and goals before reaching a decision. Detailed research combined with professional assistance are often key components in any venture’s success or failure – including franchise investments.