In a recent article, we discussed some of the practicalities of purchasing a low-cost franchise. We looked at some “cheap” franchise opportunities that have wide initial investment ranges, and noted that most franchisees should generally assume that they will not be at the bottom of the range. We also examined some of the ongoing costs that can substantially increase the total investment in a franchise, and we provided links to some of our most-popular resources for evaluating franchise opportunities.
What Do You Need to Know Before You Buy a Low-Cost Franchise?
In addition to these financial factors, there are a number of other special considerations involved in buying a low-cost franchise as well. Some of these factors include:
1. Brand Value
When you buy a franchise, what are you really paying for? The legal definition of a franchise consists of three main elements: (i) association with a trademark and (ii) access to a marketing plan in exchange for (iii) payment of a fee. For many franchisees the association with a trademark (or “brand name”) is one of the most valuable – if not the most valuable – aspects of franchise ownership.
If a franchisor offers a low franchise fee, one of the key questions you need to ask is, “Why?” Could it be because the franchisor’s brand value is minimal? If so, then you need to seriously consider if even the low franchise fee is justified in terms of the brand recognition you will enjoy as a franchisee.
2. Business Methods and System Standards
Does the franchisor offer real-world-tested business methods and marketing strategies? Will you have access to system standards that add value and that will be uniformly enforced throughout the franchise system? As with most things, when it comes to buying a franchise, you get what you pay for, and if you are not paying much you might not be able to expect much in return.
3. Franchisee Turnover
Low-cost franchise systems tend to have a high rate of franchisee turnover, and this is worth considering for a couple of different reasons. First, if franchisees are constantly exiting the system, this can have a negative impact on the brand’s perception as a whole. Customers may not be interested in offering their loyalty to a brand that is constantly going out of business. Second, before you buy, you will want to know why the rate of turnover is so high. Are franchisees consistently finding themselves unable to turn a profit? Is the franchisor aggressively terminating “difficult” franchisees? These are facts you need to know.
4. Potential Return on Investment
In some cases, franchisors offer low-cost franchises because the potential return on investment is low as well. Particularly if the investment will still constitute a significant portion of your savings or you will be relying on the franchise as your sole source of income, you will need to be as confident as possible that you will have the opportunity to earn a viable return.
Request a Fixed-Fee Franchise Business Review
Beyond these considerations that are specific to low-cost franchises, there are numerous other legal considerations involved in buying a franchise as well. At the Goldstein Law Firm, we offer fixed-fee franchise business review services to prospective franchisees nationwide. To learn more in a free consultation, call us at 202-293-3947 or tell us how to reach you online today.
