In the pursuit of financial freedom and entrepreneurial success, many individuals are turning to franchising as a viable pathway. The allure of having a supportive team, the potential for growth, and the ability to be your own boss are just a few of the reasons why franchises are gaining popularity. Whether you want to build an empire or are happy with one unit that will help you reach your goals, combining commercial real estate investing with franchising has the potential to yield substantial profits. For the most part, you can run the business as you see fit, and the franchise is there to simply guide you on your journey.
In this article, we will explore the world of franchises, debunk common misconceptions, and delve into the key considerations for building wealth through franchising. We’ll also see how combining commercial real estate investment with franchising can be a lucrative venture, offering opportunities for diversification and income streams.
The Diverse World of Franchises
When we think of franchises, iconic names like McDonald's, Meineke, MAACO, Supercuts, and Great Clips often come to mind. However, the world of franchises extends far beyond brick-and-mortar establishments. Nearly every industry has embraced the franchise model, including the service industry. Service franchises, although less visible in our daily lives, play a crucial role, often providing essential services that we only encounter when the need arises.
Brick and Mortar vs. Service Industry
Whether it's a physical storefront or a service-oriented business, franchises offer a unique opportunity for aspiring entrepreneurs. Brick-and-mortar franchises follow the "build it, and they will come" philosophy. A well-structured franchise system, coupled with an effective grand opening and real estate strategy, can attract customers seamlessly.
On the other hand, service franchises operate in a different landscape, where customers may not be aware of their existence until a specific need arises. Successful service franchises often boast call centers that handle inquiries, provide quotes, and schedule appointments, ensuring a steady flow of business for franchisees.
Diversification for CRE Investors
Consider diversifying your portfolio by investing in different types of franchises that align with your knowledge and experience in real estate.
Think about what you need and use to keep your properties in good condition on a daily basis. Office cleaning and building maintenance are examples of service-based opportunities that franchises can help you with. Not only can you use the services for your buildings, but you can maintain other buildings as well. This will open up more contacts for you in commercial buildings that may lead to more purchase opportunities down the road.
Other sectors to explore when franchising as a commercial real estate investor are retirement homes, shared office space, and salon suites.
Look for franchises in these areas that offer support in property acquisition and conversion. Most importantly, seek out franchises with a proven track record, established processes, and comprehensive training programs.
CRE Approach to Franchising
When an investor is interested in franchising, the first step they should take is researching franchise models. Truly understand the different franchise models (e.g., retail, food service, service-based), and analyze their real estate needs.
Start off by asking yourself these questions:
- Do you need help finding good deals on commercial properties? Explore which franchises will offer you help.
- Does the franchise investment make it worth the extra help?
Financial Considerations
One of the first questions potential franchisees ask is, "How much can I make?" The answer lies in both the type of franchise and the individual's passion and comfort level. Whether it's a brick-and-mortar or service industry franchise, both offer lucrative opportunities.
The monetary investment, however, differs significantly. Brick-and-mortar franchises typically require an investment of $300,000 or more, while service industry franchises can be started with an investment of around $150,000.
Cost-Benefit Analysis for CRE Investors
Analyze the initial franchise fee, ongoing royalty fees, and any additional costs associated with the franchise. Compare these costs with the value of the support services provided in finding and acquiring commercial properties.
Explore how being part of a franchise network enhances your ability to access better deals through collective bargaining or established industry relationships. Determine whether the franchise has specialized knowledge of the local real estate market and can provide valuable insights.
You may want to consider the franchise's ability to adapt to market trends, and analyze the potential return on investment (ROI) and profitability of the franchise model, considering both the support provided and the associated costs.
Ensure that the franchise's long-term vision aligns with your business goals and objectives. One of the biggest deciding factors here would be assessing the challenges and benefits of operating without the support of an established franchise.
By carefully weighing the benefits, costs, and overall fit with your business goals, you can determine whether the support offered by a franchise in finding good deals on commercial properties justifies the investment. It's crucial to conduct thorough research and due diligence before making any commitments.
Time Commitment and Funding Options
Contrary to common belief, running a franchise doesn't always require a full-time commitment. Semi-absentee franchises allow individuals to manage their investment with as little as 10–15 hours per week, focusing on overseeing the manager and financial performance.
Financing a franchise is also more accessible than many realize, with options ranging from traditional loans to utilizing a 401(k)/IRA self-directed rollover. Having a good credit score is a great place to start when considering options — ideally a score of 650 or higher. Whether you use your own money or others', there will be pros and cons to both. The decision is completely personal to you.
Strategies for Growth
Building a successful franchise system involves strategic growth. Franchisees can start with one territory and then pursue horizontal growth by expanding into adjacent areas. A territory is a set geographic area that you have the rights to for the franchise, where the franchise will not place any other franchisee. Owning the franchise rights to a territory will allow you to open additional franchises in that area as you see fit. Horizontal growth is when you expand the area or territories you franchise in.
Alternatively, vertical growth within the service industry allows franchisees to offer additional services to their existing customer base. Let’s say you go into a plumbing franchise. You are already doing the plumbing for homes in your territory, so why not do their electrical or HVAC services as well? Maybe cleaning, painting, or other services. This way, you have the same original territory, and you are providing more services to your existing customer base. Some franchise companies even own multiple franchise groups, facilitating diversified growth opportunities.
Exit Strategies
Franchise agreements typically span 5–10 years, but franchisees aren't bound to stay for the entire term. Selling a franchise is a viable option, especially once it starts generating profits. Franchisors often assist in the resale process by notifying nearby franchises of the opportunity. Successful resales, although not as common, do occur, providing an exit strategy for franchisees.
For CRE investors, consider maintaining ownership of the properties while selling the actual franchise businesses after you create them with the help of the franchise. You would create lease agreements or revenue-sharing models to generate a consistent income stream.
Choosing the Right Franchise
Selecting the right franchise requires a thorough evaluation of personal goals, skills, and compatibility with the franchise model. Consider where you've been, where you are now, and where you want to be.
Assess how your skills align with the franchise's success criteria and evaluate the support system offered by the franchisor. Questions about training, mentorship, and the grand opening process should be addressed to ensure a well-rounded understanding of the franchise's capabilities.
Investigating a Franchise
The process of investigating a franchise typically spans about two months. Initial conversations with the franchise development manager cover essential aspects like training support systems and territory layout. Subsequent steps involve reviewing the franchise disclosure documents (FDD), which provide insights into the franchise's operation, financials, and success rates. Speaking with current and former franchisees is a crucial step, allowing potential franchisees to gain firsthand insights into the business and build relationships within the franchise community.
Meeting the Team and Legal Considerations
After thorough investigation, meeting the franchise team in person becomes essential. Building trust in the people behind the franchise is crucial for a successful partnership. Before signing any agreements, it's advisable to have a franchise attorney review the documents. A franchise attorney specializes in franchise law and can identify potential pitfalls, ensuring that the terms are fair and reasonable.
Conclusion
Franchises offer a pathway to financial freedom and entrepreneurial success, providing a supportive framework for individuals to thrive. Whether in brick and mortar or the service industry, the franchise model opens doors to diverse opportunities. Success in franchising requires careful consideration, due diligence, and alignment of personal goals with the chosen franchise. By understanding the nuances of franchising, aspiring entrepreneurs can embark on a journey that not only builds wealth but also fosters personal and professional fulfillment.
About the Author:
The best part about franchising is you do not have to do it alone. Having a consultant is completely free, and I am there every step of the way. My website can provide you with many of the tools needed to investigate franchises, and I even have a list of questions for the franchisors and franchisees as you go through the process. Don’t hesitate to reach out with questions.
Disclaimer:
The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.
