The Inside Scoop on Low-Cost Franchises

Every year there are lists created to highlight the “best” low-cost franchises. The most reputable lists come from Franchise Business Review and Entrepreneur magazine.   

Franchise Business Review’s list is based on their survey of franchisee satisfaction. I always peruse the list and am often struck by two things: what is being categorized as “low-cost” and what the heck they could possibly mean when calling them “best.”

Let’s start with the basics. A low-cost franchise is generally considered to be under $100,000 (in the case of Franchise Business Review) or under $50,000 (to qualify for the Entrepreneur list). This amount is “all-in,” which means the total out of pocket expenses you are likely to incur in getting your business up and running. That would include (among other things) the franchise fee, the marketing costs to promote your opening, any cost of leasing initial equipment needed, etc.  

In order for a business to fall into this investment range, it will almost always be home-based. This is because you are eliminating the need to lease space, build out that space, and buy expensive equipment. These low-cost franchises are going to be service businesses which rely more on you, the owner, to build your business with your marketing savvy or just plain grit. Sometimes these businesses will require cold calling tactics to really get going, usually need a lot of marketing dollars, and always involve getting out into your community and networking your little fanny off.  

So are these the “best” businesses? I would say they are best for certain people, with certain skill sets and in certain situations. Someone with high sales and marketing acumen and a desire for a home-based business (which means having a lot of flexibility in terms of how and when you work) may be a good fit.

What’s important in doing the due diligence around these businesses? When making calls to existing franchisees — something a good franchise consultant (ahem) will coach you to do — find out how soon before they got their first client, how long it took to ramp up to make regular income, and what they have found to be the best marketing strategy. Another good question to ask: “How much are you spending to market your business?”  

The best way to fail in any new business strategy is to go in undercapitalized, thinking somehow you will have clients when you “open your doors.” Marketing will be your single biggest expense in these kinds of businesses and is critical to your success. Be sure the “all in” figure in the franchise disclosure documents you are reviewing is validated by the owners that you call, and is a reasonable amount until you are cash flowing.

Jane Stein is a member of the DailyWorth Connect program. Read more about the program here.


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