Why Franchising May Be the Low-Risk, High-Reward Investment You're Looking For Building wealth in an unstable economy is already difficult, and with bank failures like Silicon Valley Bank and others, it's getting even tougher. Investors are looking for safer ways to diversify their investment portfolios — and here's why buying into a franchise may be the answer.
By Adam Povlitz Edited by Kara McIntyre
Opinions expressed by Entrepreneur contributors are their own.
While today's economic landscape is uncertain, making the right choices to build wealth isn't something to take lightly. Choosing the right investment is not something that comes naturally to most people. In many cases, people save money or invest in a 401(k) plan provided by their employer. Others take on more risk by investing in individual stocks or practicing classic principles like the 60/40 rule of portfolio diversification.
No matter the expertise, there is always a level of risk involved when investing and there are other strategies to diversify your overall investment portfolio.
Related: 7 Things You Need to Know Before Becoming a Franchise Owner
Investments in franchising are an alternative
Franchising can be a worthwhile option for those who want to expand their investment portfolio in the long term. It offers advantages with numerous benefits as a long-term investment strategy. The long-term growth prospects are exciting, and there are plenty of franchises (and their respective industries) to choose from.
Many examples of franchise investments in the food and beverage or health and wellness industries exist. Subway, Dairy Queen and Anytime Fitness, to name a few. With these particular brands, franchisees benefit from substantial brand equity and it helps that they're built on proven business models, training and ongoing marketing and back-office support, including financial management tools and access to capital.
Several industries have recently been recognized for strength and viability even during turbulent or uncertain economic times, including the Great Recession of 2007-08 and the Covid-19 pandemic. These franchises have been referred to as recession-proof franchises, as many of them were called to the frontline to help provide baseline human and business services.
For example, one industry that continues to prove itself during strained economic times is commercial cleaning. Franchising opportunities in commercial cleaning are plentiful and many brands have survived and thrived during past recessions and global pandemics.
During the Covid-19 pandemic, commercial cleaning companies were relied upon to keep businesses (including hospitals, medical testing centers, doctor offices, grocery stores, etc.) clean and disinfected. Commercial cleaning suddenly became a topline business operation process as a redefined customer expectation, and the definition of cleanliness materialized. According to industry analysts, the commercial cleaning industry is expected to hit more than $468 billion in revenue by 2027. That's a 51.67% increase over the market's $308.7 billion value in 2020.
Building on an existing model
Master franchising is an investment many are discovering due to recent economic uncertainties. Master franchising involves taking control of a region or territory to expand unit franchises under the same brand umbrella.
As an investor looking to increase returns, the master franchisor aims to invest in an established brand through territory ownership and selling unit franchise models to local entrepreneurs looking to go into business themselves. As the regional franchisor, the investor controls high-level business decisions, such as marketing and sales, while the party franchisee staffs, manages and executes at their independent location.
The benefits of franchising go beyond just expanding your business reach. Engaged franchise brands help their franchisees in many ways, including financial management tools, marketing technologies and cash flow. By using your established brand, you can attract potential franchisees who may not have considered starting their own business otherwise.
In addition, the benefits of franchising as a long-term investment strategy are immense. One key advantage is that franchisees make decisions and are their own boss, allowing them to run the franchised business according to their preferences. When a franchisor welcomes a new franchisee into its system, they ensure the franchisee is well-equipped to take on this new venture. This includes extensive training, support, assistance and guidance in every aspect of the business. This allows for greater flexibility and control over one's career path.
One significant benefit of franchising is that it allows investors to acquire a franchise and develop their own franchise company. This approach pays off as the franchise program provides access to a proven business model, which has been tried and tested in various locations. Additionally, franchising enables investors to open more locations under the brand, increasing the business they can generate. Buying into a franchise also means lower risk, as the brand network offers ongoing expert support while operating within an established business model.
Another significant advantage is the opportunity to invest in an established franchise business product already developed and modified for market success while operating under a recognized brand. Additionally, franchisors often modify their franchise agreements to suit individual franchisees' markets.
Related: The Pros and Cons of Franchising Your Business
Is franchising safer than a savings account or stocks?
Recent events in the banking and financial sectors are concerning for many people looking to build a portfolio that can sustain their lifestyle through retirement. With bank failures like Silicon Valley Bank and others, investors are nervous about cash sitting in savings accounts (not to mention the next-to-nothing returns) while the banks ineffectively raise investment rates against inflation. Investors are looking for other vehicles to utilize their cash where they can earn a more substantial return with lower risk. This is where franchising starts to look safe, attractive and viable, especially given the scrutiny of the franchise purchase process.
Franchise disclosure is a critical component of the process, offering prospective franchisees the opportunity to read about the rules, laws, and requirements before investing. The Franchise Disclosure Document contains a wealth of essential information, such as crucial operating details and locations of other franchise operators. This allows entrepreneurs, both experienced business owners and first-time investors, to make informed decisions about owning their business. The franchise rule requires franchisors to offer support to keep franchise operators' employees and provides growth opportunities for owner-established investors.
Franchising might be an exciting option for investors looking for new and creative ways to protect their savings while putting their money to work. As with any decision, due diligence, research and learning are always recommended. Additionally, franchise investment is a topic of conversation that investors can engage with their fiduciary, wealth or financial advisor.
