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HOT PROSPECTS – LOW INVESTMENT

by Simon Lord,
last updated 06/07/2010

March 2009 - Buying a job or following a dream? There are plenty of franchises available that don’t cost an arm and a leg, says Simon Lord

Low-investment franchises have become hot properties. As people find their jobs a lot less secure, they’re looking around for something that will enable them to create their own future. As a result, franchisors are reporting that the level of enquiries has increased dramatically, especially in those franchises which require capital of $50,000 or less. After all, for many people looking to make the jump into self-employment, it makes sense to start with something that doesn’t mean putting their whole house on the line.

‘In the last six to nine months we’ve seen a 20-25% rise in enquiries,’ says Richard Karam, founder of The Coffee Guy franchise. ‘Many of them are facing a change in work circumstances and are often either getting a small payout or are towards the end of their working lives and concerned about being able to find work again. They’re realising that companies can’t afford to have loyalty to their staff and may not be able to offer them a future so they’re taking charge themselves. If that means they can also enjoy some flexibility in their work hours or lifestyle, so much the better.’ At the same time Richard, like other franchisors, reports that potential franchisees are taking longer to make the decision to buy. ‘That’s fair enough – it’s good that people are being prudent. The important thing, though, is that they do actually work out what is right for them and what’s not, rather than being scared into doing nothing.’

A popular misconception is that low-investment franchises are about ‘buying yourself a job’. In some cases, that can be true – and there’s nothing wrong with that. In other cases, however, a small investment can actually offer a franchisee the chance to start small and grow a sizeable business. It all depends on what you want – and what you choose.

What’s Available?

Low-investment franchises cover a huge range of business types. Yes, there are the lawnmowing and home cleaning type opportunities, but there are plenty of other options. Apart from all sorts of home services, there are specialist commercial services such as ceiling cleaning or courier delivery. There are franchises for the practically-inclined in everything from aluminium joinery repair to house inspection. If you love kids there are children’s gyms, after-school care or tutoring businesses, while professional people might find what they are looking for in property valuation, care management for the elderly or computer services.

The financially-minded can explore bookkeeping and administration or mortgage and investment franchises. Although many food businesses require higher levels of investment, distribution or vending franchises can be a good place to start, and experienced managers might consider taking on a regional master franchise for a business such as commercial cleaning that will challenge both their business-to-business sales skills and their people management techniques. Other options include health & safety franchises, shuttle bus services, windscreen repair and even ultrasonic golf club cleaning services. Flick through the Directory and you’ll be surprised at what you can find.

What Should You Expect?

So if you’re looking at a low-investment franchise, how can you expect it to differ from a franchise that costs maybe $200,000 or more? Less than you might think, it would appear. Whether it’s a cleaning business or computer services, you should still expect:

  1. A proper franchise selection process that assesses your suitability for the business – not just whether you can carry out the work involved, but whether you can communicate with customers, make sales if required, run the business successfully and maintain standards.
  2. Assistance with getting any finance you may need from a reputable lender – perhaps by helping you prepare a presentation for a bank.
  3. Full training in both the operational side and the management side. This may involve everything from equipment maintenance to scheduling, quoting, invoicing and credit control. It may cover goal setting, calculating break-even and the use of computer systems.
  4. On-the-job experience that helps you learn the business before you start relying on it for your income.
  5. Manuals that detail every aspect of running your business (nobody will expect you to remember every detail you’re told in training, so make sure you know where those details are written down).
  6. Marketing and advertising that attracts customers for you.
  7. Ongoing support where you need it. You will be better at some aspects of the business than others. That’s normal, so make sure you can get help to improve in the areas where you are weak.
  8. To be part of a network or community of franchisees with whom you can share ideas and experiences. This helps ensure that you don’t feel alone, as many individual business owners do.

Having said this, every franchise will differ in what it offers. Some franchises will find work for you, others will teach you how to get your own customers. In service businesses, some will carry out quoting for you, others will explain the quoting process so you control it yourself. Some will carry out credit control and effectively charge for the service – others leave it to you.

The important thing is that you choose a franchise that you have checked out (see page 17) and believe you can trust. Beware: in the low-investment part of the market, there will always be fringe operators who are prepared to prey on the uninformed or the careless, especially those with redundancy money burning a hole in their pocket. Take care and take advice.

What Will The Investment Really Be?

One of the first things to check out in any franchise is what the total investment will really be. The figure quoted for a business might be just $30,000, but this could just refer to the amount of cash you need to put in initially to pay the fee. In addition to this, you may also need to finance equipment, a vehicle or premises and have enough money left to cover your living costs until you get established. This need not be a problem, but it is best that you are aware of it right at the very start – apart from anything else, it will enable you to compare different franchise opportunities on an equal basis.

Here are some of the elements that you may need to consider. Ask if all the below are included or additional to the quoted figure. If they are additional, ask what figures you should allow for.

Initial Fee The cost of buying the right to operate the franchise.

Training Sometimes charged separately from the additional fee, or may involve travel and accommodation costs.

Equipment Most franchises involve some specialist equipment. How much does it cost? Can it be financed or leased in some way?

Fit-out Retail premises will need to be appropriately laid out. There will be signage costs. Even home-based businesses will require the setting up of some form of office space, probably complete with computer.

Vehicle Nearly all franchises will require you to have a suitable and appropriately sign-written vehicle. Do you need to buy this upfront or can it be leased?

Working capital Although some franchises will produce an income from day one, many don’t. This means you will need working capital to live on and to fund the business’s growth until it starts to be profitable. How much will you need and how long for? The franchisor should be able to advise you.

Establishment costs Setting up a business costs money. You need to consult a lawyer and accountant (do not skip these steps) and put in place the right business structure to protect you. You may want to set up a trust.

Many franchisors have finance packages that enable new franchisees to get into business for the lowest possible level of up-front investment. For example, at The Coffee Guy Richard Karam has put together a package that includes the initial fee, sales and marketing assistance, barista training, initial stock and an exclusive territory. There is an additional cost, of course, which is the fully-equipped ‘mobile espresso unit’ – the sign-written vehicle with its built-in coffee machine. These units can be leased or financed so that ingoings are kept down. ‘We have a good enough track record now that the banks are incredibly supportive, and by making the franchise so affordable we are able to select real quality people as franchisees,’ Richard says.

Other franchises have also developed a variety of ways to keep the up-front investment down. Some offer what are effectively ‘lease to buy’ schemes that enable you to increase your ownership of the business gradually by paying for it through the profits you make. If this is offered, check with existing franchisees that the business’s profitability really will generate sufficient profits to make this practical, or you could end up worse off than a ‘wage slave’.

Where the franchise is a new one, the franchisor may offer special deals because they are keen to grow fast in order to achieve immediate buying power, advertising economies and market share. Dream Doors is one such example. While established franchises generally offer more certainty than new ones, a start-up franchise also offers benefits such as a choice of the best territories and locations. Just be careful to do your homework even more carefully on new franchises and, again, do consult a lawyer.

Is There A Guarantee?

One feature that some low-investment franchises offer is a guarantee of work or income. While this can be reassuring if you are leaving a regular pay cheque behind for the first time, it is still not the same as being employed. The amount guaranteed is likely to be enough to see you through difficult times or the initial start-up period, but if you do not believe that you will be able to achieve your real goals in any particular franchise then it is not the one for you.

In general, guarantees are divided into two types: work guarantees, where the franchisee is guaranteed a certain value of work that they must go out and do in order to generate income, and income guarantees, where the franchisee is guaranteed a minimum income. Both will have very specific terms and conditions attached and it’s important that you understand what these are before buying the franchise. Again, consult a franchise lawyer.

Here are some questions that may help:

  • Is it a guarantee of work to an agreed value or of income to a set level?
  • What is the guaranteed amount?
  • Under what circumstances will it be paid?
  • How long will it be paid for?
  • What special conditions apply? (eg. must you accept any work given anywhere, must you contact the franchise office every day for work?)
  • What happens if the franchisor cannot afford to pay the guarantee for the specified period?
  • If you take the guarantee out of the package, does the franchise still appear to be attractive and viable? (find more on guarantees)

What Return Should You Look For?

In franchising, as in most things in life, you get what you pay for. In other words, don’t expect a five-figure investment to produce a six-figure income. It can happen, of course, but usually only after you have put in a few years of hard work. That’s why it’s important to go into any business with a realistic expectation of what you can achieve. If you’re seeking to replace a $100,000 salary, don’t expect to do it on a $20,000 investment.

Decide what your own goals are. If you operate them properly, most franchises should provide a fair wage for the hours you put in, a return on investment and a tax-free capital gain when you sell them. What do you realistically want to achieve in each of these areas? Can your chosen franchise deliver it?

Once again, this is an area where franchises differ. In some businesses, your return will depend on the hours you yourself put in – in other words, your income will be limited by the hours you can work. If you’re looking to buy yourself a job, this may be exactly what you want. The fact that you own the business, and that a good franchise will assist you in making the most of each potential working hour, should mean that you achieve a higher income than you would receive if you were employed in a similar position.

Start Small – Think Big

On the other hand, just because you start your own business with a low-investment franchise, it doesn’t mean that it will always be a small business. Many franchises offer the opportunity for you to grow a business beyond what you can handle yourself. You may be able to employ staff as your business grows, or even appoint sub-franchisees. In some cases, if you started with a larger exclusive territory, once you have built up your business to a size you are comfortable with, you may be able to divide it and either sell the extra clients back to the franchisor or (with the franchisor’s permission) sell part of your territory to a new franchisee – thereby focusing the growth of your own business on a more compact, easily-serviced area. These options can offer good franchisees an attractive capital gain while still retaining their core business.

There may be additional opportunities for growth from taking on additional territories or larger territories. In some franchises, what is called ‘multi-unit franchising’, where one franchisee owns several operations within the system, is positively encouraged. Some franchises, such as PoolWerx, offer a structured ‘career path’ that enables franchisees to grow from a ‘man with a van’ type operation to owning a retail hub with a number of mobile units.

You can also view a low-investment franchise as a stepping stone that enables you to gain confidence in running your own business before ‘trading up’ to a larger investment franchise or even taking on a regional master franchise opportunity. Many master franchisees start as franchisees.

Another advantage that some low-investment franchises offer is the ability to start part-time and only become full-time once your business is sufficiently established. This may enable you, for example, to go on working during the day while you build up an evening commercial cleaning business, or for you to build up the franchise while your partner keeps his or her regular job until the business is big enough to employ both of you.

Do make sure that your franchisor approves of this plan before buying, though – establishing a new business takes a lot of time and energy and they may require you to work full-time in the business from the very start.

Finally

Whatever your reason for looking at a franchise, there’s plenty of choice available. Take a look through our Directory and you’ll find a lot of good businesses in a variety of different industries. Choose wisely and you’ll get help, support, a good system and perhaps some form of guarantee. You may be able to create a sizeable business that will eventually be worth many times what you invest in it. At the same time, you’ll want to check the details and the franchisor out carefully before making any decision. Choose wisely and you could find the opportunity of a lifetime.

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