Low Cost Franchise Industry Profile
A low cost franchise is an ideal option for entrepreneurs with limited capital to invest. The range of available industries extends across virtually all types of business categories. You can own a low cost franchise in which you can use your professional expertise, or you can own one for which no prior experience is required. Many business models in this segment allow you to conserve costs with home offices or virtual enterprises, while economical options that operate in stand-alone physical spaces also are available. Any of these opportunities can work well for individuals with limited start-up funds, including students, stay-at-home parents and retirees. While the initial output may be minimal, you can achieve maximum potential with ownership of a low cost franchise.
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Overview and Trends
Low cost franchises are characterized by the fact that they can be purchased with a minimal capital investment. While the initial appeal of low cost franchises is economic, the unique characteristics that allow these businesses to be financially accessible also make then attractive to specific demographic groups. One of the most common factors among low cost franchises is that many can be run from home offices. As a result, they typically require less physical labor to establish and maintain. This can be attractive to people with physical limitations or mobility restrictions who may be unable to put in the work required to establish and maintain a freestanding location.
Low cost franchises are particularly appealing to the growing numbers of senior citizens looking for second careers or supplemental income. According to a 2017 Gallup poll, 74 percent of employed U.S. adults say they plan to work past retirement age, likely on a part-time basis. Another 11 percent plan to continue working full time. Researchers reported that the major reasons older entrepreneurs say they start their own companies are to have scheduling flexibility and generate supplemental retirement income. The growing number of older franchise owners supports the fact that low cost franchises can accommodate these considerations. About 28 percent of franchise owners were age 55 and over in 2015. This was a 40 percent increase from 2007 when the same group accounted for 20 percent of franchise owners, according to a report by CNBC.
Low cost franchises also appeal to entrepreneurs at the opposite end of the age spectrum. CT Corporation reported that 60 percent of college graduates surveyed indicated that they wanted to start their own businesses, while 67 percent did not understand how to go about it. Low cost franchises can offer a new generation of entrepreneurs the opportunity to become business owners with the guidance and backing of an established organization. In addition, first-time franchisees may be able to arrange the minimal financing necessary for low cost franchises by soliciting loans from family and friends rather than having to rely on financial institutions. By starting business ownership early, millennials can learn the basics of business ownership with less risk and valuable guidance.
The fact that the franchise industry recognizes the demand for low cost franchises is apparent in the list of Entrepreneur magazine's Franchise 500, an annual list of the most successful and financially sound franchises in all industries. On the 2018 list, 24 of the top-ranked franchises could be purchased for $24,000 or less. An additional five were available for startup costs under $10,000. In addition, many types of franchises have worked to make their businesses home-office friendly. Almost 30 percent of the franchises listed can be run as home-based businesses, an alternative that helps keep both initial and ongoing costs down.
Individuals who pursue low cost franchises can join the growing number of people working in home-based businesses. About 22 percent of the self-employed population has a home office as their primary workplace, according to a report from business consultants Global Workplace Analytics. It's an option that has financial advantages. Between 2005 and 2014, business owners with home-based businesses, such as low cost franchises, that qualified for home-office tax deductions retained about 36 percent of their total revenue as net income. This is significantly more than other types of businesses, which kept about 21 percent, according to the U.S. Census Bureau.
Low cost franchises can allow entrepreneurs of any age to enter the franchise industry with opportunities for ongoing income or as a basis for future growth and expansion:
- Numerous low cost franchises exist in recession-proof industries such as childcare and education, restoration and damage repair, pet services and healthcare.
- Low cost franchises are less risky than independent ownership for new entrepreneurs because these businesses have the backing and guidance of an experienced organization to support investments.
- Financing a low cost franchise may be easier for younger franchisees who may lack the credit history or collateral to secure a larger loan from a traditional lender.
- According to The Wall Street Journal, franchisees can expect to pay about 20 percent of initial expenses from personal funds, an accomplishment that may be more realistic when you're dealing with low cost franchises.
Common Business Models for Low Cost Franchises
Low cost franchises are available in virtually every franchise industry. Accessible entry fees and low recurring costs increase ownership opportunities for first-time franchisees and those with limited start-up funding. Selecting a business model that meets your personal goals as well as financial limits is key to maintaining the commitment and motivation you'll need to succeed at any investment level.
Some of the most common business models for low cost franchises include:
Low Cost Franchises Providing On-Site ServicesThese low cost franchises allow you to schedule and arrange service logistics via telephone, online or mobile app communication. However, services are performed at the client's home, office or a neutral location that is not owned by the franchisor. The use of a specially equipped van, trailer or other mobile unit may be required to provide services. Some of the most successful low cost franchises using this type of business model are:
- Cleaning franchises such as ChemDry and Squeege Squad
- Outdoor franchises such as Archadeck and Outdoor Lighting Perspectives
- Restoration franchises such as 1-800 Water Damage and Bio-One Inc.
- Senior Care franchises such as Comfort Keepers and Home Helpers
- Specialty service franchises such as Glass Doctor and Hood Guyz
- Vending machine franchises such as Healthier 4U Vending and KarmaBox Boutique Healthy Vending
Low Cost Franchises Operated in Home Offices as Virtual BusinessesSome low cost franchises can be operated exclusively in home offices. In these cases, services are secured and provided electronically. Franchise owner and clients may never meet or even communicate personally. These types of franchises typically are owner operated, often with no additional staff. Some options for this type of low cost franchise include:
- Advertising/Marketing franchises including Perkup Rewards and N-Compass TV
- Business services franchises such as American Business Systems and Scanelite Document Scanning
- Human Resources/Recruitment franchises such as MRI Network and Total Reporting
- Investment franchises such as Divine Explorations Oil and Gas Investors and Commercial Capital Training Group
- Real Estate franchises such as Homevestors of America and 14 Moves
- Travel planning franchises such as Dream Vacations and Cruise Planners/American Express
Low Cost Franchises Operated as Stand-alone BusinessesSome low cost franchises operate in freestanding physical locations. These companies exist in business models that operate economically in their own stand-alone site. Set up and maintenance costs are reduced by the design and management of these spaces. In some cases, the franchises are operated as a specialized service within a larger partner business. Some franchises that operate with this business model include:
- Fitness franchises such as Shred 415 and Title Boxing Club
- Food franchises such as Firehouse Subs and Rocky Mountain Chocolate Factory
- Healthcare franchises such as ARCpoint Labs and HealthSource Chiropractic
- Personal Services franchises such as Bishops Barbershops and Merle Norman Cosmetics
- Printing franchises such as Minuteman Press International and Proforma
- Retail franchises such as Dollar Store Services and Scott & Molly's Boutique
Financial Matters of Low Cost Franchises
Many entrepreneurs are surprised to learn that they can realize their dream of business ownership with a low cost franchise. While some of the most well-known franchises have upfront costs of $1 million or more, lucrative franchise opportunities exist at all investment levels. A significant amount of national franchises require between $50,000 and $100,00 in start up costs. No matter what your initial investment costs, you can expect to pay royalties or other regular fees to your franchisor, as well as costs for marketing or advertising, depending on your franchise agreement. To balance that out, you may be able to claim tax deductions for a home office used solely for your low cost franchise. Franchise fees, when paid regularly and according to a set formula, also may qualify as tax deductions.
If the cost of starting a business seems daunting, securing the funds required to purchase a low cost franchise can make business ownership more feasible because:
- You may be able to fund your venture with personal resources or loans from family and friends.
- Smaller loan amounts may qualify for local microloans intended for specific geographic areas or demographics.
- If you're among the oldest baby boomers and over 70.5 years, the age at which you must start taking minimum distributions from your retirement accounts, you may be able to fund your investment from your savings.
- Funds from an IRA or 401(k) can be used to buy a low cost franchise by rolling money over into a corporate retirement account to invest in the business, a multi-step process that can be handled by a financial specialist, according to The Wall Street Journal.
While you may be starting out as a small business with lower initial costs, you'll have the backing of your larger franchisor organization. This association typically includes financial perks such as franchisor-backed loans or recommendations to third-party lenders. You also may be eligible for franchise assistance in funding and securing major purchases. Franchise group discounts on purchases related to equipment, inventory and professional services also can help reduce both initial and ongoing costs.
You can find a low cost franchise that may work for you by searching Franchise Opportunities' Low Cost Franchises category.
While your initial investment will be smaller, a low cost franchise will still give you the advantages that franchisees enjoy at every investment level. As a franchise owner, you'll be implementing a proven business plan that gives you the best chance of success. By taking the guesswork out of decisions related to business planning, organization and marketing, you'll have a head start versus being on your own and learning by trial and error. With the name of an established franchise behind you, your new business can market the benefits of a dependable reputation to potential customers.
As the owner of a low cost franchise, you also can expect access to the same type of resources available to any franchisee in the industry. Even if you're working on a tight budget, you'll get valuable input and guidance from the experts on your corporate franchise team. These experienced professionals can give you direction in:
- Setting up your business to maximize efficiency without compromising effectiveness
- Securing permits, licenses and insurance at minimal costs
- Attending franchise-specific training to maximize programs and practices
- Identifying and reaching the most lucrative target markets
- Resolving challenges related to your specific franchise
- Making connections with other franchisees to share solutions
While low cost franchises can yield significant profits, it's important to be realistic about the business venture you're undertaking and your expectations. You'll be better positioned for success with the backing and experience of your franchise behind you, but you should expect to contribute a significant amount of time and effort to become accustomed to your new venture. According to the U.S. Census Bureau, about 70 percent of all home-based businesses, including low cost franchises, succeed within three years of founding. This may be a challenge for retirees who want to earn profits quickly and move toward a more flexible schedule.
As a franchisee, you'll have the benefit of a company with a sound reputation in your corner. However, you'll have to work to maintain that reputation with your individual clients. You also may have to deal with a negative backlash if one of your fellow franchisees tarnishes the franchisor reputation with poor business practices. In addition, geographic exclusivity can protect you from franchise competition, but you may have to contend with local or virtual independent contractors who have more flexibility in reducing prices or personalizing services. You'll also have to stay abreast of your competition and work within your franchise system to gain and retain clients.
However, you can work to ensure that you position your low cost franchise to succeed. By maintaining a strong online presence, you can help keep the franchise name familiar even when clients don't need your services. Using social media, mobile apps and online marketing can be done economically with significant results for franchise owners working to minimize expenses. By encouraging satisfied customers to share referrals, the returns can be worthwhile. According to a Nielsen survey, 92 percent of consumers trust referrals from people they know. In addition, people are four times more likely to make a purchase when referred by a friend.
Characteristics for Success: Who Should Consider a Low Cost Franchise?
If you think a low cost franchise may be right for you, you're certain to find an opportunity that allows you to pursue your goals and interests within your level of investment. With the support of your franchise team, you can succeed even if you're a first-time franchise owner. However, you'll be best positioned for success if you understand the unique challenges and demands of franchises in this category. Having some of these skills and abilities may increase your potential for satisfaction and success as the owner of a low cost franchise:
- You have a practical knowledge or formal training related to the products or services you're providing. Doing what you know, either through first-hand experience or franchise training, can help you recognize problems quickly to minimize lost time and revenue.
- You have the appropriate physical space necessary for a home office if that is part of your business plan. If you're operating your low cost franchise at home, you'll need to establish systems that allow you to maintain professionalism and organization in a non-traditional workspace.
- You have experience or an education in business management or marketing. No matter what type of business format you're operating, you'll need to ensure that your franchise remains profitable and that you're able to identify solutions if it begins to fail.
- You have realistic expectations. Any new franchise may take a while to become profitable and validate your investment, no matter how big or small the initial cost.
- You don't confuse low cost with low effort. Just because your initial investment may be lower in comparison to other franchises, you'll have the same risks and obligations as any other business in the industry, though possibly on a lower scale.
- You can work within the franchise system. While a major benefit of owning a low cost franchise is a more flexible lifestyle, you'll still have contractual obligations to the franchisor, which may affect the way you run your business and how you spend your time.
- You are willing to hire employees to do the jobs you can't. Whether you need employees to provide specific expertise or on-site staffing, knowing when to hand over the reigns to the right people frees you to spend your time where it's more likely to benefit your business.
*Based on currently active listings at FranchiseOpportunities.com