Financial Advice

by Simon Lord

last updated 24/06/2019

Simon Lord is editor of Franchise New Zealand media and has worked in franchising in New Zealand and the UK for over 35 years.

How To Evaluate A Low-Investment Opportunity

by Simon Lord

last updated 24/06/2019

Simon Lord is editor of Franchise New Zealand media and has worked in franchising in New Zealand and the UK for over 35 years.

Buying a job or following a dream? Franchising can offer an inexpensive way to go into business with some real support behind you, says Simon Lord

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. 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. Low-investment franchises cover a huge range of business types as you can see in our Franchise Directory of over 275 different opportunities, searchable by different investment levels.

What should you expect?

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. Printed or online 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 available).
  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 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 or retirement money needing to produce an income. 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 be 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.

Many franchisors have finance packages that enable new franchisees to get into business for the lowest possible level of up-front investment or have 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. 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. You can find out more about guarantees at www.franchise.co.nz/article/242.

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.

Finally

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, even if you start part-time to establish your business before giving up your day job.

Whatever you do, take the time and take the advice you need – a good rule of thumb is to invest an hour of research for every $1000 you plan to invest. And make sure you choose a franchise that suits you in terms of both the money and the time you have to invest. Choose wisely and, regardless of budget, you could find you’ve got the opportunity of a lifetime.

Simon Lord is editor of Franchise New Zealand media and has worked in franchising in New Zealand and the UK for over 35 years.

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