5 ways to start investing in franchises
You’ve undoubtedly heard that franchises are a good investment. You may even have explored the possibility of investing in a franchise, but realized you don’t have the huge outlay of cash (or the lifestyle) to go all-in on a franchise location. If that sounds familiar, we have some great news for you …
There’s more than one way to invest in franchising.
While it is common for people to hear about franchising and immediately think of buying a franchise location, there are other ways to participate in this valuable asset class.
Depending on your desired investment capital and how involved you want to be in a new venture, here are five ways you invest in the franchise model at any price point.
How to get started with franchise investing
Hands-on franchise ownership
Buying and building a franchise location is how many people get their start investing in franchises.
Owner-operators buy a franchising license from a franchise brand. They access all systems and proprietary information to make their franchise location a success. Many owner-operators begin with a single location and branch out as they learn to scale their business.
Buying a franchise is a great way to establish a stable, primary source of income for those looking to transition into full-time entrepreneurship. Profit margins on a franchise location are excellent, ranging from 25 percent to up to 200 percent in only a few years – but the initial investment is cost-prohibitive for many. Franchise to open a single location can start at around $50,000 and climb into hundreds of thousands of dollars, depending on the industry.
Who ownership is best for: The most successful owner-operators are often franchise managers who expand into ownership after learning the model on the job. Other franchise investors who choose the owner-operator model may come to the venture with an MBA or other type of business degree to give them a leg up on running their first location.
For many franchise entrepreneurs, the business evolves as their experience increases. Many single-location owners expand into multi-unit ownership (MUO). Often, these multi-unit owners install managers at individual locations for daily operations, which allows the franchise owner to spend fewer hours working on-premises.
With this management structure, an owner’s involvement in the business shifts to a “managing the managers” approach to ensure smooth operation across the business. While a semi-absentee owner will occasionally perform activities at locations, most of their time is devoted to back-office operations and higher-level management.
Who semi-absentee is best for: This model works best for owners with more experience in a single location who have proven the concept by staffing and scaling a location. These owners possess a deep understanding of the business model and are prepared to replicate their success across multiple locations within the network. Some owners also buy franchises in multiple, complementary networks to offset issues of seasonality or help owners cross-sell between aligned business models.
Absentee (Third-party management)
In the fully absentee model, the owner turns over operations to either (A) a management and staff group or (B) a professional franchise management firm. At this stage, the owner is no longer involved in the daily management or operations of the business, though s/he may spend some time checking in on locations to ensure smooth operation. All time in the business is devoted to ensuring business continuity through any administrative issues.
At this point, the owner may heavily invest in multiple locations within one or more franchise networks. Owners gain market share by buying into a territory, investing in licenses in bulk, and potentially sub-franchising through a master franchise agreement.
To run an absentee franchise model, the franchisor must allow absentee or master franchise agreements. Certain types of low-headcount businesses are best for this model, with cleaning companies, food service chains, and gyms being some of the most popular options.
Who absentee/third-party management is best for: This model works best for investment-minded business owners who have considerable capital and experience to invest in the franchise brand. At this stage, they may be assisting sub-franchisors in scaling locations. The investor must be prepared to pay for bulk franchise licenses, royalty fees, build-out, and management services for all locations.
Publicly traded franchise stocks
For those who want to benefit from the success of the franchise model without direct ownership, investing in publicly traded franchises as a shareholder is an effective way to benefit from a passive investment model.
As with many other types of investments, investing in a publicly traded franchisor requires time and due diligence. Many brands such as McDonald’s, Planet Fitness, Snap-On Tools, and others allow a passive investor to take advantage of the strength of franchising without buying franchise licenses.
There are obvious trade-offs between buying stock in a company and investing directly in the franchise. Investing as a shareholder, for instance, allows investors to make a smaller investment with greater liquidity. It allows investors to forego the time commitment involved in direct ownership. Participating in the public markets introduces more volatility than the ownership models, while also reducing the returns that direct owners hope to enjoy.
Who franchise stocks are best for: This model works best for traditional investors who want to bolster their portfolios with strong brands that offer recession-resistant returns. It is great for investors who only want to take part in professionally managed, traditional stock portfolios.
Why fractional franchise investing?
Fractional franchise investments offer a number of benefits over traditional franchise ownership, such as:
Manageable initial investment: Unlike traditional franchise fees and build-outs of $100,000–$1M, fractional ownership costs start at as little as $500.
High-yield passive investment: Fractional franchise funds allow you to participate in franchising without directly working within the business. Investments see returns in as little as one to two years.
Inflation and recession hedging: The performance and ROI of franchise brands create a time-tested inflation hedge that reduces investor risk. These recession-resistant brands provide more stability than the public markets, even through economic downturns and recessions.
Broad diversification: Funds comprise a portfolio of top-performing franchise brands that are diversified across industry and geographic location. This mix of locations and brands creates multiple layers of diversification and allows investors to take part in this import alternative asset class easily.
Multiple forms of return: Investors in fractional franchises see dividend returns from the revenue generated within the fund, and the value of their investment increases as locations increase in value.
How to get started with FranShares
Getting started with a FranShares fractional franchise investment is easy. After signing up, you’ll be notified of upcoming portfolio funds. Investors commit $500 – $10,000 in a fund and receive dividends over a time horizon of just a few years – much shorter than other alternative assets, such as venture capital funds, with a five- to ten-year return horizon. We make investing easy, and building passive income with franchises even easier.
Ready to get started as a franchise investor? Join our waiting list to find out about new funds opening soon.