Are Franchises a Good Investment?

Kira Brecht
U.S.News & World Report

Many people have the urge to ditch the 9 to 5 routine to live the dream and be their own boss. In this daydream, there is no set yearly salary, and the sky is the limit for income-earning potential.

Are you ready to be your own boss? For some, franchises may be the answer. A franchise investment offers a ready-made business model, along with training, guidance and support.

In recent years, the economic track record for franchises has been strong. Franchise businesses are growing at a faster rate than non-franchise so far in 2016, according to the International Franchise Association. For the past five years, the average annual job growth in the franchise sector was 2.6 percent, nearly 20 percent higher than other businesses, the IFA says.

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But there are risks to every investment. In this case, a wannabe entrepreneur should look closely before leaping. There are many factors to consider, and first and foremost is to determine if this is the right business approach for your personality.

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Franchisees are often referred to as entrepreneurs, but they are really formula entrepreneurs, says Michael Seid, managing director of MSA Worldwide, a franchise consulting firm based in West Hartford, Connecticut, and author of "Franchising for Dummies."

"An entrepreneur is quite independent and looks to chart their own course, while a formula entrepreneur has the ability and desire to take someone else's methods and system and execute it without significant changes," Seid says.

You need to have start-up capital. There are a number of costs involved with a franchise. The first is the initial franchise fee. Many franchise fees range from $15,000 to $50,000, and in some cases this includes the cost of training. In the United States, the franchise fee for Subway is $15,000. But the total investment to open a Subway restaurant is estimated between $116,000 and $263,000.

If that sounds steep, Entrepreneur magazine compiled a list of the top low-cost franchises that can be started for less than $60,000. Included on that list are Jazzercise, with an initial investment ranging from $4,000 to $13,000, and Synergy HomeCare, a non-medical home care company, with an initial investment from $35,000 to $149,000.

Read the fine print to determine what exactly you will get for your franchise fee.

Do your due diligence. Prospective franchisees need to evaluate the market they plan to open their business in, Seid says.

"If it's a retail business, are locations at a reasonable price available?" he says. "Are there workers available at an affordable price point and with the necessary skills and licenses? Are the necessary consumers available in the quantity required to be successful?"

A common mistake among first-time franchise buyers is confusing vocation with avocation, says Rick Bisio, franchise coach and author of "The Educated Franchise" in Anna Maria Island, Florida.

"First, you must be passionate about being a business owner. Find a business that fits your skills, lifestyle and financial requirements. Finally, you need to make sure you could enjoy the work," he says. "People who have owned several businesses rarely make this mistake because they know the business is a vehicle to the destination, not the destination itself."

Consider present and future economic trends when choosing the type of franchise. The U.S. is moving from a manufacturing economy to a tech economy, Seid says.

[See: The 10 Best Ways to Buy Tech Stocks.]

"We are in an interesting economic changeover, similar in many ways to what took place from the changeover from an agrarian economy to a manufacturing economy," he says. "In a gig economy, outsourcing is growing. This is especially true with an aging baby boomer with in-home health and valet needs, two-income families with a host of outsourced child care requirements including education, entertainment and edutainment needs. Obamacare's implosion is forcing changes on how medical services are delivered, and franchising is also moving into the medical field."

Successful franchise systems need to be highly adaptive to change, especially as the impact of millennials continues to develop, Seid says.

"Millennials are coming, but they are not here yet as the dominant economic force," he says. "But franchising is a long-term investment, so understanding where millennials will be purchasing and what they want and how they want it always should be factored in."

All franchises are not created equal. Review the recent track record of success for the potential franchise opportunity you are considering. The number of openings, closings, transfers and terminations over the last three years for any system is available in the Franchise Disclosure Document (FDD), Bisio says.

While there are many factors to consider when making a career change and business investment, a franchise can help increase the odds of success.

"If someone is looking to open a new business and does not have a personal history of operating that type of business successfully, franchising is relatively safe and can be a highly correct investment decision," Seid says. "Given the growth of franchising, even during the recent recession, franchising, while not foolproof, is an outstanding and safer way to get into business."

Finally, ask a lot of questions and take the time to do your research. This is a big investment decision. MSA publishes "Making the Franchise Decision" workbook, which is a tool to evaluate different franchise opportunities.

[Read: Why High-Yield Bonds Belong in Your Portfolio.]

If you hit on the right formula for you, this could be the first step to a fulfilling and rewarding new career and investment opportunity.



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