Considerations When Investing in a Franchise

1. It’s a Relatively Low-Risk Investment: One of the major advantages for franchise investors is how risk-averse franchising is compared to investing in a completely new business idea. It helps that franchise businesses are usually in low volatility sectors (such as food and drink or fitness). However, the main reason investing in a franchise is lower risk is because you’re buying a tried and trusted business formula, which means you’re benefitting from the mistakes and learning experiences that others have had over maybe decades.
2. Solid Returns: A serious investor is one that’s looking for stable, consistent returns on their investment rather than trying to double their money every two years. A typical franchise after Year 2 is generally looking at anywhere from 10%-20% annually, which is much higher than the rate of interest in any bank (less than 1%) or any treasury bond (3%). With such a solid rate of return, your initial investment can be paid off within a decade at least, giving you income and the opportunity to reinvest somewhere else.
3. Reliable Metrics: People might wonder ‘do angel investors invest in franchises’ and the answer is that they do when they can see the clear numbers in front of them. When considering any investment, being provided with reliable metrics of costs and expected revenues makes the decision-making process a lot easier. This is provided for in Item 19 of the Franchise Disclosure Document (FDD), the document that a franchisor must supply to anyone thinking about investing in a franchise, mandated by the FTC. It outlines potential costs and earnings from the figures given by all of the franchisor’s operations.
4. Business Structure: Another good reason for investing in a franchise is that a lot of the heavy lifting has already been taken care of in terms of the business plan and how the operation will work. This ready-made plan also removes much of the variance and business risk associated with investing in a new startup, with the investor knowing that following the plan is a good path to success. Especially for new investors who may not have run a business before, having a system to replicate saves a lot of the time that would be needed to find out how to manage the business, find suppliers, deal with staff etc.
5. Potential Franchisees Need Angel Investors: Investing in a franchise is not just beneficial for the investor it’s also a good deal for the potential franchisee who’ll be running the franchise. Franchises can require initial startup costs ranging from $90,000 to over $1 million for high-value locations. With that in mind, many franchisees need to search for finance or other investors to help them get off the ground. For people thinking of investing in a franchise, this creates an opportunity to take an equity stake in the new franchise operation, guaranteeing them a share of the income while minimizing required input.
6. Franchise Resales: Stable franchise operations with years of steady income are also a very valuable asset for investors to sell on. As the franchise model is built on long-term partnerships and stability, they are attractive propositions for people wanting to slot into an established business. This means that after having their investment returned and receiving income over the duration of their ownership, the investor can also extract a lump sum payment from their involvement in the franchise by selling the operation.
7. Choose Your Input Model: Different investors have different business approaches; some like to be right in the thick of things, while others prefer to focus on other things while receiving a passive income. For those investing in a franchise, the beauty is you can choose whichever model you like. Many franchise investors enjoy the part-time (or even full-time) CEO role, making management and other decisions to move the business forward, whereas others leave it to the franchisee to run all day-to-day operations.
8. Low-Risk Investing in an Entrepreneur: Often, as an investor, you may come across a talented entrepreneur you want to invest in but can’t find the right opportunity. Investing in a franchise can allow you to get behind someone you believe in while also minimizing risk by adopting a tried and trusted business plan and taking advantage of the market research and brand recognition of a larger franchisor.