In the world of alternative investments, franchise ownership often flies under the radar. Yet for those seeking to build wealth and achieve financial freedom, buying a franchise can be a powerful strategy that combines the benefits of business ownership with the support and proven systems of an established brand. In a recent episode of the Passive Investing from Left Field podcast, Jim Pfeifer sits down with franchise consultant Kim Daly where she shares valuable insights into the world of franchising and why it deserves consideration as part of a diversified investment portfolio.
The Role of Business Ownership in Building Wealth
When examining the paths to wealth creation, two strategies consistently rise to the top: business ownership and real estate investing. As Daly points out, “Most millionaires own their own business. The business is the heart of the alternative investment portfolio.” While many investors focus solely on passive income streams like real estate syndications or stock dividends, owning and operating a business can provide higher returns and greater control over your financial future.
Franchising offers a unique middle ground between starting a business from scratch and purely passive investing. It allows you to leverage the brand recognition, proven systems, and ongoing support of an established company while still enjoying the benefits of business ownership. This combination can significantly reduce the risk and learning curve associated with entrepreneurship.
Franchising vs. Traditional Business Ownership
One of the most compelling arguments for franchising is the dramatically lower failure rate compared to starting an independent business. While about 90% of new businesses fail within the first few years, franchise success rates are much higher. Daly explains that for the types of franchises she works with, success rates are often 90% or higher.
This increased likelihood of success stems from several factors:
- Proven business model: Franchises have already tested and refined their systems in multiple markets.
- Brand recognition: You benefit from established customer awareness and trust.
- Training and support: Franchisors provide comprehensive initial training and ongoing assistance.
- Marketing assistance: Many franchisors offer national or regional marketing campaigns to drive business.
- Purchasing power: Franchises can often negotiate better rates with suppliers due to their scale.
Selecting the Right Franchise Opportunity
Contrary to popular belief, choosing a franchise isn’t primarily about picking an industry or product you’re passionate about. Daly emphasizes that the most crucial factor is finding the right fit between your skills, personality, and goals and the franchise’s operational model and culture.
“The industry is irrelevant,” Daly states. “What’s more relevant is when you’re a business owner, what you’re going to realize is all businesses are the same, and what I’m more in tune with is the vision of you as an investor.”
This approach means that your franchise search should focus on:
- Your skills and strengths: What type of role energizes you? Are you a people person or do you prefer working behind the scenes?
- Time commitment: How involved do you want to be in day-to-day operations?
- Risk tolerance: Are you comfortable with businesses that have more variable cash flow, or do you prefer steadier, more predictable income?
- Financial goals: What level of return are you seeking, and over what time frame?
- Exit strategy: Do you plan to operate the business long-term or sell it after a few years?
By focusing on these factors rather than specific industries, you may discover exciting franchise opportunities in unexpected areas. Daly mentions examples like businesses that paint parking lots or provide specialized home services – niches that many people don’t even realize are franchised.
Franchising as Part of a Diversified Investment Strategy
For many alternative investors, franchising can serve as a complement to more passive investments like real estate syndications or index funds. While a franchise requires more active involvement than these options, it also offers the potential for higher returns and greater control over the investment’s performance.
Daly argues that the “total portfolio of investments must include business cash flowing returns,” positioning franchise ownership as a core component of a well-rounded alternative investment strategy. The key is to balance the higher potential returns and more active nature of franchise ownership with other, more passive investments that provide steady cash flow with less day-to-day involvement.
Financing Your Franchise Purchase
One common misconception about franchising is that it requires millions of dollars to get started. In reality, there are franchise opportunities available at a wide range of investment levels, from as little as $50,000 to over $1 million.
Daly highlights several financing options for prospective franchisees:
- SBA loans: Many franchises are pre-approved for SBA financing, making the loan process smoother.
- 401(k) rollover: The Rollover for Business Startups (ROBS) program allows you to use retirement funds to start a business without incurring taxes or penalties.
- Traditional bank loans: Some banks specialize in franchise lending and may offer favorable terms.
- Franchisor financing: Some franchisors offer in-house financing options to qualified candidates.
The ROBS program, in particular, can be an attractive option for those with substantial 401(k) balances. It allows you to invest in yourself and your business without taking on debt or giving up equity to outside investors.
The Importance of Franchisor Quality
When evaluating franchise opportunities, it’s crucial to look beyond the product or service and assess the quality of the franchisor itself. Daly emphasizes that “the number one reason to invest in a franchise is because you have found people, people who have a proven track record of leadership in building franchises.”
Key factors to consider when evaluating a franchisor include:
- Leadership team experience: Do they have a background in both the industry and in franchising?
- Growth trajectory: Is the brand expanding in a sustainable way?
- Support systems: What kind of ongoing training and assistance do they provide franchisees?
- Technology: Do they invest in up-to-date systems to help franchisees operate efficiently?
- Marketing support: How do they help drive customers to individual franchise locations?
A strong franchisor can make the difference between a struggling business and a thriving one, so it’s worth taking the time to thoroughly research and vet potential franchise partners.
Balancing Passive and Active Investments
While franchise ownership isn’t completely passive, it can be structured to require varying levels of owner involvement. Daly explains that “the most passive business you can own is the one where you’re most highly leveraged.” This could mean investing in a larger, more established franchise with a full staff and general manager, or choosing a business model like a laundromat or salon suites that requires minimal day-to-day oversight.
However, it’s important to recognize that even the most “passive” franchise will require more involvement than truly passive investments like real estate syndications or index funds. The tradeoff is the potential for higher returns and the ability to directly influence the business’s performance.
Exit Strategies for Franchise Owners
One advantage of franchise ownership is the potential for a lucrative exit when you’re ready to move on. As Daly puts it, “I believe all businesses are built to be sold.” When you invest in a growing franchise brand, you’re not just building a single business – you’re also benefiting from the increasing brand equity and market presence of the entire franchise system.
This can lead to several favorable exit options:
- Sell to another franchisee: As the brand grows, there may be a pool of interested buyers looking to expand their franchise holdings.
- Sell to the franchisor: Some franchisors buy back successful locations to operate as corporate stores.
- Pass down to family: A successful franchise can become a legacy business for the next generation.
- Renew and continue operating: If you’re enjoying the business, most franchise agreements allow you to renew for additional terms.
Daly advises thinking in terms of 5-10 year horizons rather than trying to plan for 20+ years in the future. This allows you to capitalize on growth opportunities while maintaining the flexibility to adapt to changing circumstances.
Is Franchise Ownership Right for You?
Franchise ownership represents a unique opportunity to combine the benefits of business ownership with the support and proven systems of an established brand. While it requires more active involvement than some passive investments, it also offers the potential for higher returns and greater control over your financial future.
Before diving into franchise ownership, it’s essential to carefully assess your goals, skills, and risk tolerance. Working with an experienced franchise consultant like Kim Daly can help you navigate the complex world of franchising and find opportunities that align with your personal and financial objectives.
Ultimately, franchise ownership isn’t for everyone. But for those willing to take a more active role in their investments and who have an entrepreneurial spirit, it can be a powerful wealth-building tool and a rewarding path to financial freedom.
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This article is for educational purposes only and is not to be relied upon as the basis for entering into any transaction or advisory relationship or making any investment decision. All investments involve the risk of loss, including the loss of principal. Past performance, and any performance results reflected in this article, is not an indication of future results.