How to choose a low-cost, high-return franchise
Cleaning upholstery, top right, and greeting a customer, bottom right, for Heaven’s Best; pressure-washing for Window Genie, left. Both are examples of franchises that cost under $100,000 to get started.
A franchise that costs under $100,000 may seem like a bargain, and that’s true for many successful operators. But choosing the right one requires vigilance and a sharp pencil, just like for the more expensive kind.
David Flax got sick and tired of making 100 cold calls a day trying to recruit good employees for clients. So after 13 years of running his own staffing firm, Flax spent $65,000 to become a Window Genie franchisee in Alpharetta, Georgia.
It’s not a great deal of cash, unlike the $1 million and above franchises profiled in the October issue of Franchise Times. But choosing a franchise on the low end of the investment scale takes just as much homework, notably because lower-priced franchises tend to attract less sophisticated investors.
And, critics say, there are possible pitfalls for the more economical franchises. One is they tend to produce less revenue, and hence lower royalties, so some franchisors potentially are more interested in signing up new franchisees to collect initial fees instead of supporting them over the long term.
Window Genie is listed on Franchise Business Review’s Top 100 Low-Cost Franchises for 2014. A Portsmouth, New Hampshire, market research firm, FBR examined more than 135 low-cost franchises and surveyed nearly 10,000 franchises to compile the report. The list is based on franchisee satisfaction in such areas as financial opportunity and training and support, unlike other industry rankings based on sales or unit growth. The average cost of franchises on the ranking was $64,000.
Some franchises have consistently made the list the last eight to 10 years, including Heaven’s Best Carpet Cleaning, Our Town America, Focal Point Coaching, Sandler Training, Weedman, Snap-on Tools, Jump Bunch, U.S. Lawns, Murphy Business & Financial, Homewatch CareGivers, Right at Home Senior Care and MaidPro.
There is no shortage of low-investment brands to choose from. Some 754 brands—covering more than 22 industries from maintenance services to quick-service restaurants to computer products and services—require an initial investment of $100,000 or less, reports FRANdata, a franchise-focused research and consulting firm in Arlington, Virginia.
For Joel Pacheco, knowing what training and ongoing technical support he would get from the franchisor was a major factor in why he bought a Heaven’s Best franchise. He says the franchisor provided details in advance on such things as number of potential residential and business customers. “This research was critical because it helped me determine when I would recoup my initial investment and get a sense of future profitability.”
He invested $28,000 in cash to open in September 2014 in Flower Mound, Texas. Formerly a production manager at an aviation firm, he chose the concept after working with his brothers, Art and Marcus Pacheco, who are Heaven’s Best franchisees in San Antonio. The ability to work flexible hours also was an incentive for Joel to buy in, allowing him time to drop off and pick up his daughter from school.
The issue of franchisors collecting fees from new franchisees yet not supporting them long-term is a common criticism and happens at all levels in franchising, says Eric Stites, CEO and managing director at Franchise Business Review. He says there are some unethical franchise brands that prey on unsuspecting franchisee candidates, but his firm has no hard data that shows there are more “unethical” franchise brands in the low-cost sector versus higher-cost franchises. If a brand is operating unethically, and churning through franchisees, it’s easy to spot in Item 20 of the Franchise Disclosure Document.
“We always recommend people talk to existing franchisees as part of their research,” Stites adds. “If the brand has been around for a while, but you can’t find any franchisees who have been with the company for five or more years, that would be a big red flag.”
There’s been no study to assess whether a higher failure rate with lower investment brands exists, says Darrell Johnson, CEO of FRANdata. He says there are many low investment brands that have been around for decades and enjoy a good performance reputation.
There are some low-investment brands with high turnover rates, with lack of sufficient training and field support being possible causes, he says, however, the lower the investment level the less a franchisee has at risk. Johnson has observed that brands costing $100,000 or less are less likely to be resold later. Franchisees are more likely to either not seek contract renewal or just fade away, making it more challenging to assess failure rates.
After investigating the category, MaidPro franchisees Adam Brennan and his wife, Chrissy, were pleased with the brand’s support and structure when they opened a MaidPro franchise in April 2014 in Beaverton, Oregon. They invested $50,000 to start up, using personal savings and a loan from an investor for financing.
Previously a sales and sourcing manager for a wood products firm, Adam says they wanted a business that didn’t require more personal spending to fuel growth. Their revenue mainly comes from recurring maid services. The couple uses social media, an online referral site, direct mail and word of mouth to help boost sales.
For potential franchises, Adam advises they first investigate the concept they’re buying into. He says the franchise disclosure document provided him enough details to evaluate his business opportunity. Then the couple visited MaidPro’s home office to get a sense of the franchise’s true culture. “There are a lot of low-cost franchises that are more interested in your initial purchase capital than your long-term success,” Adam says. “We chose MaidPro because they care about our future.”
Some operators select less expensive franchises to initially avoid the big expense of a bricks-and-mortar facility. A Pillar To Post franchisee in Cincinnati, Tom Capuano wanted a low-cost franchise that did not demand buying a fleet of trucks or acquiring a building since he didn’t have a lot of money to invest. He started in 1997 with about $25,000, using $10,000 out-of-pocket and cash from three credit cards.
Capuano says he and his wife, Tracey, chose Pillar To Post mainly to provide home inspections in southwest Ohio because they were impressed with the franchisor’s marketing support and how it supported the growth of franchisees.
Formerly a heating and cooling contractor, Capuano felt technically competent to offer home inspections. In 2000, he used profits to buy a second franchise for $21,000 and in 2009 moved the business from his home into office space.
Revenue and profits have steadily grown, fueled largely by Capuano building a network of roughly 800 real estate agents who refer him to buyers and sellers. His firm expects to do 2,600 home inspections this year versus 2,200 last year. “We’re constantly adding new Realtors and trying to get more business from the existing referral base.”
He plans to employ eight inspectors by next spring, doubling the number from 2012. All thanks to his low-cost investment.