Low Cost, Bigger Return: Expert insight for new and potential franchisees

by Eric Stites for Franchise Times' SuperBook of Franchise Opportunities

The overall franchise landscape is a very different place than it was five years ago. Thankfully, it’s also a different place than it was three years ago when the economy went bottoms-up.

Entrepreneurs are cautiously looking for business opportunities again, lenders are slowly opening their coffers, and franchisors are finding creative ways to make franchise ownership more accessible. In recent months, franchisees and franchisors alike have been optimistic, and universally, there are some common themes about what makes a franchise idea stick—even in the worst economy since the Great Depression.

Good things come in small (investment) packages. When it comes to buying a franchise, the bigger investment doesn’t always result in the highest ROI. Many higher cost franchises require a physical space, dozens of employees, lots of overhead, and are not easily downscaled when business slows.

Low-cost franchise opportunities—those that require an investment of less than $100,000—are more popular than ever. These are businesses that typically do not require a large bank loan. Instead, you can start from a home-based office, using personal savings, retirement funds, or even home equity (if you’re lucky enough to still have some!) to finance your new business.

Entrepreneurs fondly refer to this as bootstrapping—keeping your initial startup costs as low as possible to minimize capital requirements and growing your business organically. While I caution anyone from starting a business without being properly capitalized, if you’re smart and watch every penny you spend, you can be successful without putting your entire nest egg at risk.

Many franchisors have found ways to decrease the overall investment needed to start a business by reducing their equipment and physical space requirements, offering internal financing, or even lowering their initial fees and/or royalties. These efforts have helped franchisees remain competitive and profitable in a tight economy. And just because an opportunity is low cost doesn’t necessarily mean its low profit; some of these opportunities can grow to be quite big—with annual sales well over $500,000 and solid profit margins.

Putting the “life” back in making a living. In addition to the practical considerations of a low investment opportunity (fewer employees, lower overhead, etc.), part of the allure of many low-cost franchises is the lifestyle that comes along with it. Entrepreneurs in today’s economy don’t necessarily want to make millions (or at least they recognize and accept that that may not happen). Many people are simply looking to run a good business, make a decent living, maintain a healthy work-life balance, and have fun in the process.

Sometimes, a recession actually helps. It goes without saying that, during a recession, people spend more money on what they need than on what they desire, but there are offerings—like child care and pet services—that remain in demand, regardless of what’s happening on the stock market. The children’s services sector—specifically providers of afterschool sports programs—actually benefitted from the struggling economy, as schools were forced to cut athletic programs.

Senior care, or home health, is another area that has thrived in recent years. In a struggling economy, regardless of the business type, franchisees need to create a perceived need for their services in order to keep bringing customers in. It’s not necessarily about finding a franchise opportunity that’s recession-proof. Ultimately, franchisors and franchisees need to think of their business concepts both ways: Will a business concept that was popular because of the recession be needed when the economy recovers, and vice versa? And if not, what changes/services/products can they add to ensure that it will?

National brands may not matter as much as community ties. Many franchisors will tout their national advertising budget or brand as a selling point, but, in a lot of cases, a franchisee’s biggest competitors are local, not national—especially in a struggling economy. Franchisees need to constantly market their services or products at the local level. Maintaining good relationships with other local businesses, schools, and community programs is always key to franchisee success.

Satisfaction (still) matters: The one thing that hasn’t changed in five years is the importance of franchisee satisfaction. Regardless of what’s going on in the economy, franchisee satisfaction is one of the primary indicators of a good business.

In recent years, franchisors have made more of an effort to monitor and improve their franchisee satisfaction, and it appears to be working. General franchisee satisfaction is up 8 percent compared with last year, according to a recent Franchise Business Review survey of more than 10,000 franchisees. Satisfaction with financial performance is also up 7 percent, a significant increase year-over-year. Ratings in the area of training and support services provided by franchisors have shown the greatest improvements—increasing by 15 percent year-over-year.

Many franchisors have stepped up the support of their franchisees in the past few years, and this has clearly made a huge difference. Perhaps most striking of all are the companies that have maintained impressively high franchisee satisfaction throughout the economic crisis, proving that operators of a well-run franchise will not only survive, but also thrive—in good times and bad.

(Click here to read original article.)

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