This is a question we are commonly asked. The assumption behind the question is that when it comes to choosing a franchise the right franchise a person can buy their way to a better performance by investing in more expensive franchise opportunities.
Not only is this inaccurate, it can be a risky assumption to make. There are two reasons to exercise caution when equating the price of your franchise with your ability to increase future earnings.
They come to you versus you go to them
The universe of franchise opportunities can be divided into 2 large groups: franchises that operate in a visible and accessible location and sell their products/services out of that location, and franchises that operate their business from a home office or commercial office space that is the hub for their service delivery business.
Why this difference matters: If your franchise requires a highly visible location that will require renovation to meet the specs of the franchisor, your total investment price will go up. Period. Example – a location that is visible and requires 2000 square feet can easily cost $250k to $300k to get open and operating. If your location requires 4000 square feet, the price goes up. Simple math.
However, if you open a franchise that delivers services and/or products to your customers, it is likely that your overhead for this business will be much lower. The ‘estimated initial investment’ for this type of business ranges between $60k and $125k, including working capital.
There are many multitudes of franchises that fit into each category that can produce a solid executive income. An initial investment of $250k might return 80k annually or well above that number depending on the franchise. An investment of 75k can evolve into a million-dollar business or could end up being the perfect 20-hour a week business, returning far less. There is no correlation between initial investment and ultimate revenues and profit.
The Multi-Unit play
Once you find the right franchise it is very common to feel compelled to commit to additional franchises at the point of purchase, even though it could be years before you get around to opening the additional franchises. The reason people often want to buy more franchises at the outset is often that it seems that more locations/territories will result in more money coming back to you down the road. This is the “buy now, expand later” approach.
The Challenge: Launching a start-up business requires capital. Not just the capital you need to spend when getting ready to open your business, but also the additional monies you will want to have on hand to fuel the growth of your business. If you pay additional franchise fees now to reserve locations for future growth, it is likely you are diminishing the financial support you can provide to that very first location. A better approach is to strike a reasonable balance between investing now in Location #1 and decreasing the number of additional franchises you commit to at this early stage. Once you achieve consistent profits in location #1, you can use some of those funds to support the opening of your second location.
By tying your future expansion to the success of your first location you are creating a foundation on which to expand that preserves your personal capital. Two or three highly successful franchise locations are more valuable than a single location and a bunch of franchises that you bought but cannot afford to open because you are cash poor.
