Top Low-Cost Franchises – A Franchise Business Review Special Report

written by Business View Magazine October 21, 2014

A Franchise Business Review special report.

One of the best ways to know if a franchise opportunity is really as good as it appears is to look at its franchisee satisfaction data. Not all brands survey their franchisees, but those who do offer a wealth of information on the system’s leadership, culture, training and support, financial outlook and franchisee community to set clear expectations for potential franchisees.

The low-cost franchise segment has traditionally been very service-oriented because these business models don’t usually need a big office space, inventory or other resources that require lots of capital. Some of the service brands on our top low-cost franchise list this year include 360 Painting, Window Genie, and Weed Man. We also see franchise companies that provide homecare services (e.g., Right at Home and Visiting Angels), kid- and pet-focused care (e.g., Soccer Shots and Sit Means Sit), and business consulting services (e.g., ActionCOACH and FocalPoint Consulting) on our list.

In the last year or two, we’ve seen increased popularity in franchise businesses related to the home, either real estate concepts like Help-U-Sell or companies that offer home services like Budget Blinds.

Prospective franchisees may be surprised by the brands and concepts that fall under the “low-cost” umbrella. Food franchises, for example, which typically require a big investment in real estate, equipment and supplies, don’t usually have much of a presence on our annual low-cost franchise ranking. However, some mobile food concepts, like Repicci’s Italian Ice and Happy and Healthy Products, offer franchisees the opportunity to run a food-related business without the large, up-front investment.

The franchise businesses represented in this report have an average initial investment of less than $100,000, but within the different brands, there is great variety of options and investment levels available. Some franchise opportunities can be started for less than $5,000, while others cost $90,000.

Most of the franchise executives we spoke with for this report said franchisees are using their available savings, 401K, and/or family and friend investments to purchase their businesses. Although it may seem like getting a loan for a lower-investment business would be easier, that’s not the case for most low-cost franchises.

“We don’t have a lot of hard assets so it’s very difficult to get a bank loan for our franchise opportunity,” said Dan Smith, CEO of Bevintel, a beverage inventory management franchise servicing bars and restaurants.

To offset this, a number of franchise businesses offer in-house financing programs. “We finance 50 percent of the franchise fee, which sends a strong partnership message to the franchisee,” Smith said. Similarly, U.S. Lawns, Help-U-Sell, and Heaven’s Best Carpet Cleaning all offer some form of in-house franchise financing options.

“So far this year, most new franchisees have taken us up on our in-house financing,” said Heaven’s Best CEO Cody Howard. “We require $14,450 up front, and we will finance the balance of $14,450 over a five-year period.”

CruiseOne, a travel agency franchise specializing in the cruise business, discounts its franchise fee for people with a successful track record in the travel industry, according to CruiseOne’s Senior Vice President Debbie Fiorino. Experienced franchise candidates with the appropriate certifications can save up to 95 percent on their initial franchise fee based on how much they’ve made in the past.

In the last several years, many franchise companies have taken steps to reduce the financial burden of running a franchise by reducing franchise fees, eliminating office space and vehicle requirements, and working with vendors to negotiate the best deals possible for franchisees.
“We have a long-term track record of success with suppliers,” said U.S. Lawns President Ken Hutcheson. “That’s helped sweep the issue of payments off the table, so franchisees can lease trucks, materials, supplies, and equipment at little to no expense in the early months.”

“We have vendor relationships that give very healthy discounts to franchisees. And we also allow franchisees to do their shopping at the local level if they can find a better price,” said Robb King, vice president of operations for Paul Davis (the parent company of low-cost franchise Paul Davis Emergency Services, which specializes in emergency mitigation and reconstruction).

Along with financing the start-up of their new franchise business, franchisees must ensure they have enough liquid capital to run the business until it starts generating positive cash flow. Franchisors told us this is sometimes a challenge in the low-cost space because franchisees have just enough cash to fund the initial start-up but not enough cash to cover expenses early on.

WIN Home Inspection works with a banking partner to offer franchisees operating capital beyond what is needed at start-up. This helps new franchisees cover their vehicle, tools, and marketing costs in the first year, President Steve Wadlington said.

People considering any franchise opportunity should ask the franchisor and current franchisees about the company’s cost-cutting initiatives that directly relate to franchisees and what efforts they’ve made to ensure franchisees are well-capitalized for start-up and economic ups and downs. Franchise executives told us that franchisees in the low-cost franchise sector are more likely to be undercapitalized. This is why we urge you to carefully consider the financial documents within the franchise disclosure documents (FDD) and talk to existing franchisees about what you should realistically expect in terms of how long it takes to be profitable.

Item 7 in the FDD can help prospective franchisees make sure their franchisor is realistic and upfront about expenses involved in the business, but all Item 7s are not equal. Some franchises outline the necessary working capital, but others—who might want to keep the stated investment level as low as possible—don’t. Any investor should understand and plan for the fact that it might cost three to four times more to actually run the franchise business, as compared to the financial estimates listed in the Item 7 of the franchise company’s FDD.

Where possible, all potential franchisees should also thoroughly review and understand a company’s Item 19, if included, so they have a better idea of what to expect in the way of gross revenues and profitability. Not all franchise companies provide an Item 19 as part of their FDD because it’s not required, and, like the Item 7, every Item 19 is different. It is critical that you truly understand what you’re looking at within the Item 19. It’s up to the franchisor how detailed they get or which franchisees’ financial information they include, so you want to make sure that you’re looking at a good representation of all the franchisees and what they earn and spend.

In general, low-cost franchise opportunities mean lower risk, and for most franchisees, that’s the biggest pro of starting a low-cost franchise. Depending on the investment, franchisees who buy a lower-cost franchise will be able to recoup their investment pretty quickly and, in general, don’t risk losing their assets or retirement savings if the business fails. Many low-cost franchises can be financed out-of-pocket or through savings, eliminating the need for bank financing all together.

“Not having a large investment hanging over a franchisee’s head leaves them free to worry about making their business a success,” said Money Mailer CEO Gary Mulloy. “It allows them to do the right things to build their franchise business for the long term rather than being overly concerned about the burdens of large loans and re-payments.”

The costs associated with running a low-investment franchise tend to be lower than some of the higher-cost concepts like restaurants or retail stores. Most of the franchise businesses within the low-cost space don’t require a big physical space, lots of inventory, or dozens of employees, so it’s easier for franchisees to manage their expenses.

“You can start your new franchise business as soon as you make your initial investment because you don’t need to hire staff, purchase equipment, research and lease storefront locations … All you need is a computer, a phone line, and internet access,” said CruiseOne’s Fiorino.

Because low-cost franchises are so often owner-operated, it’s more likely that franchisees in some fields will actually get to do what they enjoy—personal training, work with children, photography, for example—rather than just managing a bunch of employees. This is a great attribute if you’re someone who wants to be very involved in your business, doing something you are passionate about, but it can also be a detriment if the business grows to demand more of your operational oversight.

Along with the pros of a lower-cost investment, there are many pros to franchising. Franchisees that invest in a top franchise get the benefits of an established brand with a larger consumer presence/awareness, a proven operational system, and the expertise, training, and support of an experienced corporate office.

This kind of franchise support is particularly important in businesses like senior care, which require very specialized skills to coordinate caregivers, manage elderly care, and follow any state and national regulations. HomeWell Senior Care, for example, provides 4 weeks of training to franchisees before opening, 8 weeks post-opening, and then weekly calls with the home office to keep franchise owners up-to-date. CEO Lori Yount says a project manager is assigned to every franchise owner that comes on board.

“We have had a lot of success since we implemented this training model, and fran¬chisees are experiencing a much faster return on their investment,” Yount said.

Many franchisees appreciate the “plug and play” nature of franchising – franchisors provide the technology platforms and materials operators need to handle tasks like invoicing, scheduling, marketing, and customer service.

Another huge advantage to franchising is the franchisee community. In franchise businesses with a strong and active franchisee community, franchise owners reap the benefits of learning from each other’s mistakes and successes.

Because low-cost franchise opportunities have so many positives, the sector attracts a lot of different franchise companies. This can be a con for franchisees.
“For businesses that have a lower barrier of entry, it doesn’t take long for local competitors to crop up,” said WIN’s Wadlington.

“A low-cost franchise may not have as much brand recognition in the community because often times, they are not storefront locations,” added CruiseOne’s Fiorino. “Everybody knows 7-11 and Dunkin Donuts because they have physical locations everywhere.”

Franchisees may need to work extra hard to differentiate their businesses from others like them in their communities—often without a lot of local marketing support from the national office.

“The drawback of a low-cost franchise is it limits the amount of bells and whistles the franchisor can give to each franchisee,” said Heaven’s Best Carpet Cleaning CEO Howard.

It’s important for anyone considering a lower-cost franchise opportunity to be realistic about what they’re going to get out of it and what they need to put into it to be successful.

“Just because it’s low cost doesn’t necessarily mean you are going to earn profits sooner—you may earn no profits,” said Paul Davis’s King.

“Franchise candidates need to look at the total cost of entry, the real cash required to get in, and how much they need to finance. They need to ask, ‘What is this business model and how much capital is it going to take to keep it operating?’”

Many owners of low-cost franchises are able to run their businesses from their homes, work their own hours, and keep their full-time jobs, which can be both good and bad when it comes to the long-term success of the business.

“The cons of a low-cost franchise can be that some candidates forget they are truly starting their own business, not just acquiring a job,” said Money Mailer’s Mulloy. “They must see this as a long-term commitment with a need to work hard in the start-up period of the franchise business to establish a solid financial base.”

With increased flexibility, sometimes comes reduced revenue potential. Not all low-cost franchise opportunities provide a full-time salary (especially those concepts that don’t require a full-time time commitment). Some are intended to be supplemental income businesses—although some of the most successful franchisees have made it their livelihood. This isn’t necessarily a con if what you’re looking for is supplemental income, but prospective franchisees should make sure they have realistic financial expectations.

Franchising is not for everyone. You need the skills to run a successful business and the willingness to follow a tried-and-true franchise system. Because they are so often owner-operators with fewer resources, franchisees at the lower investment level must be able to multi-task and wear a lot of hats, at least initially, until their new franchise business is well-established.

“We find that our owner-operator model is best suited to people who have very strong inter-personal skills—people who enjoy working with others of all backgrounds and economic levels,” said Money Mailer’s Mulloy.

“We can train anyone to run our system properly, but it is a lot more difficult to teach them how to be honest and to run their business with integrity if it has not been their life-long pattern,” added Howard of Heaven’s Best Carpet Cleaning.

Some franchise brands, like U.S. Lawns and Paul Davis Emergency Services, use a personality profiling tool to help identify which franchise candidates might make a good franchisee or, once they are franchisees, to help identify their strengths and weaknesses for running their franchise business.

“We are big fans of personality profiling to identify people’s natural orientation and match it to the core skills and attributes of our successful owners. We can use the profiles to help coach people, or other times, it identifies when someone is absolutely no match for our system,” said Paul Davis’s King.

Bevintel uses a different tact to ensure franchisees are a good match in their system. They recently launched a “franchisee in training” program, which enables people who are interested in the industry (inventory control for bars and restaurants) to work with top-performing franchisees, commitment-free, for up to two years and then transition into owning a franchise of their own.

“They come in as franchisees in training where they learn all levels of the business and operate all levels of the business,” Smith said. “Then, they move on and get their own franchise territory.”

A good franchise company will make sure you not only fit with the culture of the franchise but also have enough liquidity to fund your start-up and to run the business. Money, however, doesn’t necessarily guarantee success or failure.

“We’ve had people that barely qualified and turned out to be fantastic franchisees, and we’ve had people with loads of money who failed,” said Ron McCoy, vice president of business development at Help-U-Sell, a specialty real estate franchise.

Most of the CEOs we spoke with for this report don’t require previous experience in their specific industries, but they all require passion for the franchise business. CruiseOne, for example, expects potential franchisees to have an exhibited passion for travel. HomeWell Senior Care looks for franchise candidates committed to working with the aging population.

“The care piece is the most important for us, everything else is secondary,” said CEO Yount.

Before buying any franchise, it’s important to make sure franchisee satisfaction and performance across the board is solid. Undoubtedly, you will run into a few unhappy franchisees in any franchise brand, but broad satisfaction research, like the independent reports provided by Franchise Business Review, is that must-have, 3rd-party validation required before moving forward with a franchise opportunity. When talking to any franchise company, ask to see their satisfaction report.

The 100 companies listed at the front of this report excel in franchisee satisfaction based on recent surveys. In general, the average franchisee satisfaction score for all low-cost franchise companies is three percentage points higher than for brands costing more than $100,000, and franchisee satisfaction within our 100 top low-cost franchises is even higher.

Low-cost franchise owners rate their franchise companies higher in every category of our survey than do franchisees at brands costing more than $100,000. The most significant difference (4 percentage points) is seen in the area of Franchise Training & Support. Included in the Training & Support category are questions about a franchise company’s marketing and technology, so the high satisfaction in this area may prove low-cost doesn’t necessarily mean fewer resources available from the franchisor. The highest rated categories in our franchisee satisfaction survey are Core Values (of the franchisor) and Franchisee Community.

We recommend prospective investors carefully look at a brand’s franchisee community and ask current operators specifically about it while they’re conducting their research. Especially at the low-cost level, the franchisee community may play a big part in terms of advice and ongoing support, and it can greatly influence the overall enjoyment you get from running the franchise business.

In the category of Financial Opportunity, low-cost franchisees are slightly more satisfied than franchisees of more expensive brands, even though their average annual income is approximately the same as our overall franchise benchmark ($78,009 vs. $79,684). (It’s important to note that while the average income may be the same, the return on investment may actually be significantly higher on a percentage basis because the investment is so much lower.)

The lower-risk nature of low-cost franchises is increasingly popular with all levels of investors, and the number of opportunities and types of businesses within the space increases every day. However, as we caution with every franchise model at every investment level, not all franchises are equal, and not all “low-cost” opportunities are as good as they sound. It is important to do your homework, talk to current franchise owners, and be sure your expectations are realistic.

No matter how good the franchise brand and the franchisee satisfaction, ultimately, what matters most is how you fit into their franchise system. That’s why Ken Hutcheson from U.S. Lawns says a portion of your franchise research should include time in the home office of the franchise company you’re considering and “in the trenches” with franchisees.

“There is nothing like meeting people face to face, because this is still a personal type of enterprise. See what the people behind the franchise brand look like and whether you fit with them as individuals,” Hutcheson said.

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