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Being a business owner is an exciting prospect but usually involves significant time, effort and hands-on involvement. However, investment franchising has emerged as a flexible business model that enables business ownership with a more hands-off approach. This format allows business owners to develop a portfolio of businesses under franchised brands. This article will explain what an investment franchise is and its benefits.
What is an Investment Franchise?
Franchising is a business model that involves an individual (a franchisee) investing in and operating a business using the branding, products, and systems of the franchisor’s established brand. Investment franchising refers to the franchisee making a substantial investment into a franchise opportunity. The initial investment may be more significant than other franchising formats require.
Often, investment franchisees take a more hands-off approach to their businesses’ operations than they would under alternative formats. Rather than actively managing the franchise, they appoint a management team or hire professionals to handle operations.
Franchisors looking for investment-focused franchisees will likely expect them to have prior management experience. Investment franchisees often have relevant industry experience and come from a corporate background.
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The Benefits of Investment Franchising
1. Franchisees Can Adopt a Hands-Off Approach
Franchising covers a broad scope of industries and roles. Franchisees can be heavily involved in their businesses. Some franchisees run their businesses by themselves, these usually fall under the job franchise category. For example, mobile coffee businesses can have just one person operating the business and delivering its services to customers.
Investment franchising differs from the ‘one man and a van’ job franchise format. Many investment franchisees set up their businesses under the franchised brand but adopt a passive approach in their roles. They tend not to be involved in their business’s daily operations and have employees who handle this instead.
2. Portfolio Diversification
Individuals who engage in investment franchising see it as a way to diversify their investment portfolio. Investment franchisees might run several franchise businesses or own franchise businesses within several different brands. Franchisees who own businesses under multiple franchised brands are known as multi-unit, multi-brand operators (MUMBOs).
3. Proven Business Model
Franchises come with a proven business model and an established brand. A robust business model and good market position can help you reduce the uncertainty associated with starting a business from the ground up. Leveraging the franchisor’s expertise can further minimise the risk.
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Actions Before Investing in a Franchise Opportunity
1. Carefully Consider the Franchise Agreement
Before agreeing to join a franchise, consider the franchise agreement carefully, negotiating with the franchisor if necessary. One key aspect to review with investment franchises is the level of control you will have over your business. Carefully scrutinise the roles and responsibilities the franchisor sets out in the agreement.
You can run similar businesses nearby or open franchises under different brands. Pay special attention to the scope of exclusive territory the franchisor sets and the specifics of any non-compete clauses. These could complicate and restrict your future portfolio expansion, even beyond the duration of the franchise agreement.
It is essential that individuals considering the investment approach research thoroughly and choose opportunities carefully. Find franchises with:
- a track record of success;
- financial stability; and
- a strong level of support from the franchisor.
2. Seek Legal Advice
Seeking legal advice is highly advisable for all prospective franchisees. The legal aspects of franchise agreements can be complex. A lawyer can conduct due diligence on an opportunity and advise you on whether accepting it would be a good business decision. They can also help you identify and mitigate potential risks, protecting you from costly disputes.
3. Solidify Your Management Team
Prepare a management team capable of effectively managing the business. This is especially important if you plan to take a passive approach to day-to-day operations. A well-qualified and successful team will help ensure smooth functioning and free up your time. With a solid management team, investment franchisees can generate passive income.
Key Takeaways
If you do it correctly, investment franchising can be a great way to grow a portfolio and develop businesses passively. The strength of the franchise agreement and your relationship with the franchisor can determine the quality of a franchise opportunity.
The benefits of investment franchising include the following:
- opportunities enable passive approaches;
- potential for portfolio diversification; and
- access to a proven business model and franchisor expertise.
Before investing in any franchise opportunity, prospective franchisees should:
- carefully read the terms of the franchise agreement;
- seek legal advice; and
- prepare a solid and effective management team.
If you need professional legal advice when joining a franchise, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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