Gyms. Restaurants. Car dealerships. Whatever the franchise, celebrities, the ultra-wealthy, and private equity firms have been investing in independently owned and operated branches of established businesses for decades – and enjoying the impressive returns they often generate.
Owning a franchise of any kind can be a canny investment, offering portfolio diversification, attractive returns and a brand-led business model that’s both inflation- and recession-resistant. But the barriers to entry are often high. The initial investment required can run well into the hundreds of thousands, while operators will need to have both the time and experience to make a success of the business.
Happily, however, there’s another way in to this $787 billion-dollar industry – one which involves significantly less risk and significantly less cash. Before we explain how it works, and how you could end up benefiting from a passive income, let’s take a moment to explore the franchise business model in a little more detail.
1. An introduction to franchise investing
Less than 1 min read
Franchising has existed for more than a century. One of the pioneers here was motor-maker Ford, which permitted dealerships to sell its cars in return for a licensing fee. But the practice really took off in the 1960s and 1970s, as consumers’ (and investors’) growing fondness for big brands encouraged more companies to sell licenses for independently owned branches – both across the US and around the world.
In the US today, over 4,000 brands operating in more than 100 sectors together have over 780,000 franchises. And despite the economic impact of coronavirus, the International Franchise Association – which you’d expect to know about this sort of thing – predicted franchise employment around the world would increase by 3.5% in 2021, creating around 800,000 jobs in the US alone.
Pre-pandemic, financial data shows that some franchise owners were earning annual returns of up to 166%. And profit growth is expected to continue, too: research by industry analyst FRANdata – which also sounds like it knows what it’s talking about – shows that franchise businesses often spearhead the recovery from a recession.
2. The benefits of franchise investing
1:29 min read
For those with the time and resources to invest, franchise ownership has a lot to recommend it.
To start with, franchises can – depending on the sector – be less vulnerable to economic downturns than traditional asset classes like shares. They’re also somewhat inflation-proof: while costs might rise, products and services can be sold at higher prices. The value of any franchise real estate may also grow over time, adding another buffer against inflation and recession.
America’s Federal Trade Commission (FTC) regulates franchise ownership. Under FTC rules, every would-be franchisor has to publish a Franchise Disclosure Document outlining set-up costs and the financial performance of existing franchisees. This oversight provides peace of mind for potential investors, helping them make an informed decision when looking to open a new location.
Brand recognition is, of course, one of the key strengths of the franchise business model. Owners benefit from a proven roadmap, support from head office, established processes and ready-made marketing materials. For customers, brand recognition represents consistency: they know to expect a similar experience no matter which branch they visit. Wherever you buy a Big Mac, it always tastes like home.™
In some cases, a franchisor’s network delivers the greatest value to franchisees. When an insurance company pays for home repairs following an accident, for instance, franchised operators usually carry out the work. Such relationships are rarely available to standalone companies.
Crucially, franchise ownership also brings the potential for high returns while avoiding many of the risks associated with other “alternative” investments like venture capital. Steady income can be diversified across a broad range of locations and even different industries, from fitness to pet care and waste management. Investors have plenty of opportunities to generate a return with little correlation to the likes of stocks and bonds.
3. The challenges of franchise investing
Less than 1 min read
Nevertheless, franchise ownership isn’t without its issues.
The initial capital required to kickstart a new franchise may prove prohibitive for many. The costs of the license, real estate and fees involved can easily total more than $100,000, and owners may in reality need up to $1 million in cash. Depending on the industry and location, it could take years to realize a return on your investment.
What’s more, running a franchise requires a significant time commitment. Absent other management, the owner is in charge of operating the business on a day-to-day basis – which includes hiring staff, dealing with suppliers and implementing the franchisor’s marketing plan.
Owners also need expertise – not just to understand the industry as part of their initial due diligence process, but to run the show successfully thereafter. The franchisor might provide a blueprint, but the owner has to build the actual business.
4. A better way to invest in franchises
1:27 min read
All these challenges can put off prospective owners. But fractional investing overcomes many of them – allowing just about anyone the opportunity to earn a passive income from the franchise business model.
Fractional investing works like crowdfunding: a sponsor brings together a pool of investors to buy part-ownership of a franchise business or portfolio of businesses. It makes ownership more accessible by lowering the minimum investment to as little as $500, helping you to diversify your portfolio with an income-producing alternative asset that’s largely immune from market movements.
The sponsor also conducts due diligence on all opportunities. Measuring brand recognition and assessing past financial performance, for example, helps ensure that every franchise is well-positioned to succeed.
The sponsor then operates the business on your behalf, typically installing a management team with a track record of successfully running franchises. This model also allows owners to take advantage of economies of scale: the more locations, the greater the management’s purchasing power.
Your sponsor is responsible for meeting the requirements of the FTC and the Securities and Exchange Commission (SEC), which regulates franchise investments. That means fractional investors receive fully audited results and regular profit updates throughout the lifetime of their investment.
And best of all, unlike other group investment vehicles like funds, the sponsor doesn’t charge a fee. It aligns the interests of all parties by simply taking a profit alongside individual investors, on top of certain brokerage commissions paid by the franchisor.
So there you have it: everything you need to know about franchise investment, as well as a way for anyone with $500 to get involved. Interested in taking the next step?
To begin benefiting from the portfolio diversification and passive returns offered by fractional franchise investing, check out leading provider FranShares today.