Click to Print

Good Buy

Want to invest in a low-cost franchise? Here's how to do it right.
October 29, 2001
URL: http://www.entrepreneur.com/article/45644

Q: I have recently come into some money and have decided to invest in a franchise. I have about $20,000 to invest. How do I find a franchise that meets my investment range?

A: Unfortunately most franchise systems, even those you can operate from your home, require a great deal more than $20,000. That doesn't mean making a franchise investment is out of the picture for you, but it may require you to be creative in exploring your franchise and at least realistic in the opportunities that may be available.

There are two things you need to understand as you begin to look at franchises that require less than $20,000. The first is that you have to be realistic about how much you can earn.

Few opportunities in this world that require an investment of $20,000 will bring you take-home pay of $100,000. Make certain you understand, by talking to other franchisees in the system, how much you can realistically earn from your investment. Be certain that, if the franchise is going to be your sole source of income, you can live on it.

The second is that regardless of your take-home pay, you need to understand if the investment makes sense.

Let's suppose you can keep your regular job and still operate your new franchise. Let's also suppose your new $20,000 franchise does well and you earn $10,000 in the first year from your investment. Not many investments in this post dotcom world are likely to earn a 50 percent return on investment, but don't jump to any conclusions just yet.

If this were a passive investment, like investing in stocks, a 50 percent return on your investment would be off the charts. But most franchises are not passive investments; they require long hours and hard work. You need to compare your return on investment from the franchise realistically with what you could earn if you invested your money in a secure but passive investment and took the same amount of time and got a second job.

Saving the money you earn from your investment together with the income you earn from the second job might be something to consider. Not only may the overall return on your investment--both time and money--be higher, if it is, in a short period of time you may have enough money saved to look at a larger field of franchise opportunities.

OK--regardless of the number, you don't want to wait. You want to own a franchise now and start reaching for your pot of gold. Where do you look?

Finding the Perfect Low Investment Franchise
The good news is that there are franchises available for $20,000 or less. The better news is that there are many. Here are some resources for finding them:

Getting Creative
Many successful franchisees began their path to franchise ownership by working for another franchisee. This path will take some time and lots of phone calls, but it opens up another level of opportunity for you.

Contact franchisors that interest you and explain that you want to invest in their franchise but simply do not have sufficient money to go it alone. Ask for their advice. Some franchisors may know of opportunities where franchisees in their system are looking for individuals willing to make a small investment. This may give you an opportunity to work at a location and also have a piece of a larger opportunity. In some situations your "sweat equity" will allow you to earn your way to owning your own franchise.

Many franchise systems offering opportunities in emerging markets (inner city and urban areas) work with local Community Development Corporations, which actively seek responsible individuals with some capital. If you fit the profile required by the CDC, it's a wonderful way to get into business ownership. You can find local Community Development Corporations on the Internet or contact the International Franchise Association's Minorities in Franchising Committee. Read more about minority franchise funding here, and about a specific franchisor's program here.

Understanding how much you really have
Think you only have $20,000 in cash to invest? Think again. If you have other assets, you may be able to leverage your cash and other investments. Most franchisors today are very sophisticated in helping new franchisees find the loans required to make a franchise investment. Many have established relationships with leasing companies that can lease you furniture, fixture, equipment and signage. Some loans even provide you with the working capital you will require. Twenty thousand dollars may not be enough to buy a franchise outright, but by intelligently leveraging your assets, you may find you can broaden your opportunities. For more articles on financing your franchise, click here or here.

Don't forget your family and friends. They know you and know how hard you like to work. Your work ethic may be the perfect investment for them. Put together a business plan for your future franchise and give your family and friends the opportunity of investing with you. With the success of franchising and the weakness in the stock market today, your franchise opportunity may be exactly what their investment portfolio needs.

Some final words of advice:

Related links
Bargain Hunters
In search of the ridiculously inexpensive franchise

Michael H. Seid, founder and managing director of franchise advisory firm Michael H. Seid & Associates, has more than 20 years' experience as a senior operations and financial executive and a consultant for franchise, retail, restaurant and service companies. He is co-author of the book Franchising for Dummiesand a former member of the International Franchise Association's Board of Directors and Executive Committee.

Kay Marie Ainsley, managing director of Michael H. Seid & Associates, consults with companies on the appropriateness of franchising; assists franchisors with systems, manuals and training programs; and is a frequent speaker and author of numerous articles on franchising.