Today, David Stein is going to explore the question everybody wants to know….. Can I build wealth owning a franchise?
The Answer: Maybe.
It’s tricky. Is it possible? Absolutely! Are there franchisees who build wealth owning a franchise? Absolutely!
How to do this… first… pick a winner. Pick an industry that is growing, and there are plenty of verticals to choose from. But most importantly, pick a franchisor who has differentiated themselves in their vertical.
For example, if you pick the healthcare market, we know that the population is growing and getting older. Picking a franchise in the home health market, it’s a growing vertical. But there are 60 franchisors in the vertical, it’s highly competitive. Study up and find out how they differentiate themselves. You are basically combining two things 1) Is there a growth opportunity and 2) How do they differentiate themselves.
Next, make sure you study that FDD (Franchise Disclosure Document). All franchisors are regulated by the FTC (Federal Trade Commission) and are required to disclose certain items in the FDD. You’ll want to specifically pay attention to Item 19 which outlines the return on investment and your unit economics.
Research the franchisor’s branding. This translates to their image and the “promise” they make to the customer. How is the brand delivering on this over time, and over units. You’ll find out more about the consistency of the system as you interview their francisees. As a franchise, you’ll get the rights to use the trademark. Make sure the trademark means something.
Explore what the downsides are to investing in a franchise, especially the risks. There’s risk in starting any business, however starting a franchise, there are some risks involved. For example, the franchisor may not be operating well. That’s why you need to study the franchise itself. Is the franchise growing too fast? Have they filed for bankruptcy? Have franchisees filed for bankruptcy? Good news…. all that is in the FDD.
In addition to risks, I cannot stress enough the importance of interviewing the franchisees in a system. They will know the inside dirt and will be the best at discussing how the franchise works, and if there’s really an opportunity to build equity and build wealth in a franchise.
BONUS – FRANBOX MAILBOX
Are there any franchise businesses recession proof?
We’ve already touched on the senior home care market… the data already shows that a very strong, growing market – especially with the sandwich generation getting even more stretched on time.
Home services are another great opportunity. Regardless of the economy, there is always home upkeep that needs to happen. Probably not for renovations, but if there is a plumbing issue, that has to get taken care of regardless of the economic situation. So, certain home services tend to do well in all economic situations.
Send your questions for the FranBox Mailbox.
David Stein – Franchise Investing Insider
Laurean Callander – FranVesting Producer