Are Franchises a Good Investment?

Happy hump day! Nic here from The Alt Investor with another weekly dose of alternative investing knowledge. This week, we’re covering the ins-and-outs of franchise investing and whether this investment type is profitable and a smart move.

A commonly overlooked alternative investing type is franchise investing. Franchise investing involves investing in your own franchise or making angel or crowdfunding investments in franchises to reap dividends and returns from the business. By investing in franchises, you can diversify your portfolio, gain exposure to recession-proof businesses, and earn great yield on your investment.

What is a Franchise?

A franchise is a license from a business which allows franchisees to access a trademark, business systems, and to offer a product or service under the name of the business. Franchises can be attractive to entrepreneurs who don’t want to start a business from scratch but rather operate with a playbook and well-known business name.

In exchange for a franchise license, franchisees pay the franchisor royalties for use of their systems and name. Popular examples of franchises include McDonald’s and Subway but franchises can be regional or as simple as continuing the success of a local business with great brand recognition with another location.

What are the Benefits of Investing in Franchises?

There are three key benefits of investing in franchises:

Income

Investing in franchises can yield dividends from the franchise if you start your own or earning yield in exchange for your angel or crowdfunded investment. By providing up-front capital, you can earn income from the new franchise on a pre-set cadence. Your investment will yield dividends even as your equity in the business grows in value.

Diversification

Like with most alternative investments, franchise investments offer diversification into new industries or business types. You can round out your portfolio of investments with franchises with small investments which can be recession-proof depending on the industry.

As commenters have highlighted, fast food restaurants like McDonald’s can be recession-proof due to low cost items even as other restaurants suffer from lower foot traffic. Likewise, investing in necessary franchises like laundromats which are needed regardless of economic circumstances can be wise.

Value Appreciation

Not only can your franchise investment return income but your equity in the business can also rise in value. If the franchisee purchases the land and building of the franchise, this property can rise in value, making your stake worth more.

Does Franchise Investing Offer Good Returns?

Returns on franchises can vary depending on the franchise, location, or industry. A good average annual income return for a franchise business is at least 30 - 50% per year, which is high compared to the returns of other alternative investments.

Depending on whether you’re investing in a franchise business as the sole owner, partner, angel investor, or a crowdfunding investor, there will be different terms of the franchise agreement and how much you’re entitled to in terms of ownership or income.

When considering franchises as an investment, it’s vital you do research into the franchisor, location, potential returns, expertise of the operator, and other factors which would affect your return.

Who Should Invest in Franchises?

Franchises can be an attractive investment for a number of different types of investors. There are opportunities to invest in this asset whether you want to own your own franchise, want passive income, or are an accredited investor.

Assessing your financial situation and how much exposure to the franchise you want will be an important step in choosing whether this is the right investment for you. If you know a skilled operator interested in starting their own franchise, it may be smart to determine how much the operator needs in startup capital and whether they want an angel investor onboard.

If you have the time, resources, skills, and desire to launch your own franchise, you should determine the right industry and franchise to acquire a license for.

For investors seeking passive exposure to franchise investing, FranShares, a crowdfunding investment platform, could be a perfect fit. FranShares allows investors to invest as little as $500 into franchises whether you’re an accredited or non-accredited investor.

What Should You Look For in a Franchise Investment?

There are three primary attributes of a good franchise investment opportunity you should look for when considering this asset type.

A Successful Franchisor

Whether you want to open your own franchise business or invest in an operator’s vision, it’s important to choose the right franchisor. When you purchase a franchise license, you’re investing in the playbook and name of the business. It’s vital that the franchisor has an effective, repeatable playbook for success and will empower you or your operator to build a great business.

Effective Management

If you’re angel investing in a franchise business, you’ll need a good operator to manage the business and grow it successfully. An operator with experience in the industry and a good track record of management is key to you seeing a return on your investment.

A Plan for Profitability

Before investing in a franchise business or starting your own, you’ll need a business plan for how to make the franchise business profitable and a plan for ownership and distributions. An overarching plan for how this franchise business will scale and deliver profits to you or other investors is necessary for accountability and a smart investment.

Do You Need to be Accredited to Invest in Franchises?

To become an accredited investor you must meet certain standards to invest in higher-risk asset classes. These criteria include having a net worth of at least $1 million, earning an income of at least $200,000 in the last 2 years, or having a $300,000 joint income with a spouse.

If you’re launching your own franchise, you don’t need to be an accredited investor but if you are seeking to invest in a franchise by purchasing shares of the franchise, you will likely need to be accredited.

Crowdfunding platforms like FranShares have franchise investment offerings for both accredited and non-accredited investors.

Conclusion

Franchise investing is an exciting area of alternative investing with a lot of potential growth from income generation to equity appreciation. This investment type can be a good investment for the right investor but research is key to find the perfect opportunity and method for investing.