When it comes to making an investment in a franchise business, having a clear understanding of your goals is important for choosing the ideal business model, as not all franchises are created equal.
As experienced Franchise Consultants, knowing what you are trying to accomplish allows us to quickly eliminate dozens of business models that are not aligned with your interests. The result is focus for your franchise search, so you can invest your valuable time learning about franchises that present the potential you are looking for.
Over the past few years, the goals of the prospective franchisees in the United States who have consulted us about franchise investment have typically fallen in one of the 2 following categories:
- Replace a Primary Source of Income
- Add a Secondary Stream of Income
1) Replace a Primary Source of Income
For an investor looking to replace its primary source of income, scalability becomes the key factor when choosing the right business model. In this case, the investor is favoring financial performance over comfort as he/she can dedicate time to grow the business.
Scalability is the ability to grow the revenues of the business with incremental investments that represent a fraction of the amount initially invested in order to get in business in the first place AND these increased revenues do not come at the expense of a substantial increase in the fixed operating costs.
In other words, the franchisee can increase the revenues by making smaller incremental investments in such way that does not increase its fixed operating expenses or, at least, not at the same rate. Whenever the business revenues can be increased at a greater rate than its fixed operating expenses, the result is an increase in the profit line.
Even though “bricks-and-mortar” businesses such as fast-food and hair salons (to list a few) are the most recognizable forms of franchise, they are not known for scalability as these businesses have a certain radius of influence around their locations, which limits the growth opportunities.
Think of this: In an urban scenario, most people would not travel 10 miles to stop at your Subway franchise location in order consume a sandwich. The radius of influence of a sandwich shop, as most location-driven businesses, may be limited to a few miles.
The most scalable business models are the ones that do NOT depend on the business’ physical location to attract customers. They are operated from small office spaces, office warehouses or even from a home-office and offer the ability to add multiple teams to one territory or yet to stack multiple contiguous territories serviced from the same “base” (multi-unit deal).
You may want to read our article about “The 4 types of franchise arrangement” and learn about Multi-Unit deals.
2) Add a secondary stream of income
For corporate professionals or a serial entrepreneur considering investing in a franchise business with the objective of adding another stream of income, the ideal franchise opportunity will allow an absentee or semi-absentee operation and, as such, simplicity is the name of the game.
Location-driven businesses are very suitable opportunities for operations that will start semi-absentee. The simpler the sale process, the better.
Semi-absentee operation may be achieved with a hired manager in place or even through automated sales.
Examples of industry categories with ideal conditions for semi-absentee operations are personal care (hair salons, barber shops, spa services, etc.), retail, vending machines, automated laundry services to name a few.
For the investors who do not have any time to dedicate to the business and want to treat it as a passive investment, absentee operations can be achieved with joint-ventures deals, where the investor partners with the operator of the business.
The operator contributes with the specific know-how of the industry as well as management efforts to implement and run the business while the investor funds the operation. This is typically accomplished with a profit-sharing model and the operator reports to the investor on a regular basis.
There are joint-venture opportunities in segments such as vending machines and rural broadband internet services.
One of the best kept secrets franchises for absentee operation is a player in the fast-casual food category. They offer fresh Asian food and they have launched a full-management sister company specialized in their concept.
The investor signs a franchise agreement with the franchisor and a management agreement with the sister company, creating a white gloves solution for someone seeking a passive investment in the food and beverage category.
Who We Are
Franchise Wizards is a franchise consulting company located in Carlsbad, CA – USA, and we work with prospective franchisees interested in investing in any market in USA and Canada. We help our clients identify the best franchises for their situations and goals and provide education and coaching on the best practices to evaluate and compare franchise opportunities.
Our Franchise Matchmaking service is offered free of charge for the prospective franchisees, as we are paid by the 530+ franchisors who rely on our expertise to find the ideal franchisee partner. We also welcome E-2 Visa investors.
Schedule now your Free Strategy Session There is absolutely no obligation to invest in any of the franchises we suggest for your consideration.
