What are some franchise options that have a low barrier to entry?
A great question someone asked me this week. It triggered thoughts about franchise fees versus startup costs, and working capital needed for a home-based business if you don’t have any experience in business development.
The startup costs of any business type, including franchises, and independent startups can include:
– Equipment, inventory, leasehold improvements, legal costs to set up the entity of your business, advisory costs such as CPAs, attorneys etc.
– Financing cost if any. I.e. the cost of getting an SBA loan is around 4% of the loan.
– Working capital which can also be financed: It will depend on how long you project your business to ramp-up to enough profits: i.e. if it takes 12 months to get there, project 12 months of expenses so that you can keep the lights on in your business and in your life. If you are opening a home-based business (low startup costs) and you don’t have any experience in business development, be sure to reserve enough working capital while you learn business development to ramp-up.
Here is a difference with a franchise:
– If you do acquire a franchise unit to develop, then there will be a franchise fee. A franchise fee represents a one time cost of access to a system, methodology and proven product, service and market. The franchise fee can be between $10,000 to $50,000, again typically.
In answer to your question: Low barrier to entry in any franchise will depend on the startup costs + the working capital needed to get to profits (same as any business), + the franchise fee.
The lowest barrier to entry for franchises will usually be a home-based type of business because of the low startup costs. However many of those types of franchises will also have higher franchise fees. For instance, some home-based franchises cost $60,000 to startup and the franchise fee is $50,000: higher than franchise fees for some restaurants for example. The $10,000 difference is a measly amount recommended to launch the business including working capital (and deceivingly insufficient IMO.) A small franchise restaurant may cost $300,000 to set-up but the franchise fee might be $30,000. Although if you have the right skills (especially business development and sales skills) to start a home-based business, these can be great way to get into a business.
A word of caution: Do differentiate between franchises and business opportunities: the latter are not as regulated and can be riskier than franchises. That said, business opportunities can be great businesses too and might include distributorships, dealerships, networks and multi-level marketing (MLM.)
In general, be thorough in your due diligence when looking at any businesses. Turnkey concepts (franchises and business opportunities), independent startups, and the acquisitions of for sale businesses are all paths to get into business for yourself but their vetting and due diligence processes are vastly different.
Cheers to building a life we love!
Founder of OPEN FOR BUSINESS, Business Research Strategist, Instructor.