Franchising has been a popular business model for decades, and for good reason. It allows entrepreneurs to start a business with the support of an established brand and business model.
However, not all franchises are created equal. Cost is one of the major differences. There are lower cost franchises and higher cost franchises, each with its own advantages and disadvantages. In this article, we will explore the differences.
First, let’s define what we mean by “lower cost” and “higher cost” franchises. The exact definition of these terms can vary depending on the industry and region. And if you are shopping for a franchise to buy, you are acutely aware that your own finances are a major determining factor. If you are going to invest most of your own savings in your franchise, how much do you have to invest? Also, if you will you be investing money you have set aside for your later years, those dollars have a higher value to you than dollars that are more expendable. And if you have investors or access to credit, that is a different picture again. Only you know these deeper factors and considerations.
But for the purposes of this article, we will define a lower cost franchise as one that requires an initial investment of less than $100,000. A higher cost franchise, on the other hand, will typically require an initial investment of $500,000 or more. Of course, the value of any franchise, not to mention its potential return on your investment, depends on the strength of the company’s finances, its record of success, the average sales that have been achieved at different locations, and other factors. You should be sure to speak with current franchisees to get a handle on those factors. But the bottom line is, you need to ask a lot of probing questions and do your due diligence. Ultimately, making a good decision is up to you.
Your Initial Investment
The initial investment is the amount of money required to buy the franchise. Lower cost franchises typically have a lower initial investment, while higher cost franchises require a significant amount of upfront capital. This is one of the most significant differences between the two types of franchises. If you have limited funds, a lower cost franchise may be more appealing. However, if you have the financial means, a higher cost franchise may offer greater potential for long-term success.
Lower cost franchises may also be more accessible to first-time business owners who may be hesitant to invest a large amount of money in a new venture. On the other hand, higher cost franchises may be more attractive to experienced business owners who are looking to expand their portfolio and have a greater understanding of the risks and rewards of operating a business.
Brand Recognition and Support
Brand recognition and support are critical components of a franchise. A well-known brand can attract customers, while a strong support system can help franchisees navigate the challenges of owning a business. There are exceptions but in general, higher cost franchises have a more established brand and a more comprehensive support system, which can be beneficial for franchisees. However, this is not always the case.
Lower cost franchises may not have the same level of brand recognition as higher cost franchises, but they can still offer support in the form of training, marketing materials, and ongoing guidance. Additionally, lower cost franchises may have more flexibility when it comes to making changes and adapting to local market conditions, which can be an advantage over more rigid higher cost franchises.
Profitability
Profitability is the ultimate goal of any business, and franchising is no exception. While there is no guarantee of success with any franchise, higher cost franchises may offer greater potential for profitability due to their established brand, larger customer base, and a more comprehensive support system. However, higher cost franchises sometimes pose greater risk because the initial investment is higher and the ongoing expenses may be more significant.
Lower cost franchises may have a lower potential for profitability, but they can also be less risky. Remember that some franchises can start small and grow over time, with less pressure to generate immediate revenue. Additionally, lower cost franchises may have lower ongoing expenses, which can increase profitability in the short and long run.
Flexibility
Flexibility is another key difference between lower cost and higher cost franchises. Lower cost franchises may offer more flexibility when it comes to making changes to the business model, adapting to local market conditions, and responding to customer feedback. This can be an advantage for franchisees who want to be able to make their own decisions and have more control over their business.
Higher cost franchises, on the other hand, may have more rigid business models and may require franchisees to follow a greater number of specific guidelines and protocols. This can be an advantage for franchisees who want a more established framework and a clear roadmap to follow. However, it can also limit creativity and innovation, which may be important for some franchisees.
Owner Involvement
Do you intend to be a hands-on owner who is on the premises every day and involved in every decision? Or do you expect to be a hands-off owner who hires a manager and employees and who manages operations from a distance?
Topically lower cost franchisees require the owner to more involved in the day to day running of business than higher cost franchisees. But please remember, that is not always the case. And certainly, finances are only one consideration to weigh as you select a franchise that you will own. Have you always dreamed of owning a business like the franchise you are considering, for example? Are you entering a stage of life when you are stepping back from a long career, or are you a younger man or woman who wants to use that franchise as the first step in a long and successful career?
But please remember that you will only make progress if you do something, and that something could be to buy a great franchise. If you sit on the sidelines, you simply will not move ahead on your journey to success.
About Evan Hackel, Entrepreneur, Author Speaker, Podcaster
As author, speaker and Evan Hackel has been instrumental in launching more than 20 businesses and has managed a portfolio of brands with systemwide sales of more than $5 billion. He is the creator of Ingaged Leadership, is author of the book Ingaging Leadership Meets the Younger Generation, and is a thought leader in the fields of leadership and success.
Evan is the CEO of Ingage