Is a low-cost franchise right for you?

06/06/2018 17:00 | Start a business

Are low cost franchises right for you?

Low-cost franchises are becoming an increasingly popular option for those that can't, or don't want to, invest in more expensive options. Here, we take a look at what constitutes a low-cost franchise, how they operate, and whether they're a good option for you.

What is a low-cost franchise?

If you ask five franchising experts what the definition of a low-cost franchise is, you'll receive five different answers in return. While there's no industry-wide threshold for what constitutes a low-cost franchise, it's generally agreed to encompass those franchises that require a minimum initial investment of £10,000 or less. Though this may sound like very little, there are a surprising number of franchises out there that demand much less than this from their franchisees. In some cases, its possible to pick up a new franchise for as little as £1,000 though you shouldnt expect to see too much of a return on such a small investment.

Common low-cost franchises

Though there's no reason you can't find a low-cost franchise in any industry, they tend to be more common in specific sectors. These include;

  • Food franchises Low-cost food franchises tend to be less expensive for one of two reasons. Either they're a business that is working with enormous economies of scale, or they're a small, single person operation.
  • Online franchises Franchises that specialise in providing or promoting online services are generally inexpensive because they don't require business premises or a significant investment in stock and staff.
  • Cleaning franchises Cleaning businesses are typically one of the more easily found low-cost franchises. This is primarily because they require little more than investment in training and equipment.
  • Sales franchises Some of the least expensive franchises are those that dont require inventory or a base of operations. Door to door and workplace sales franchises both fit these criteria.

Why are low-cost franchises less expensive?

Generally, low-cost franchises can afford to be inexpensive because they dont rely on all of the expensive components of a traditional brick and mortar business. This might be because theyre;

  • Home based or mobile franchises The business premises can be one of the most expensive expenditures for any new business. Mobile or home-based franchises limit costs by doing away with this high-cost investment.
  • New franchises Those franchises that are yet to grow and expand often start out with low prices. This makes them an attractive prospect for individuals who want to get in on a good thing early and profit from a semi-speculative investment.
  • No stock or limited equipment Some business can operate without the need for any stock whatsoever, or with very limited amounts of equipment. This allows the franchisor to keep costs low.
  • Part-time franchises A part-time franchise is an excellent opportunity for those that need to fit their work around other commitments. They're also generally lower cost, mainly because they require less equipment and inventory to get them off the ground.

The advantages of low-cost franchises

Low-cost franchises have many benefits. Despite the obvious that they're low cost this type of franchise has many things going for it. For instance;

  • No barrier to entry Its often the case that promising entrepreneurs are priced out of buying a franchise because they cant raise the necessary initial investment. Low-cost franchises can remove this common obstacle and give anyone a shot at running their own business.
  • Low running costs If it's a low-cost franchise, it's almost certainly not going to cost a great deal to run. This means that you don't have to earn as much before you're profiting.
  • Get in early Many franchises are low cost because they've yet to establish themselves and develop their brand. This means that they're a fantastic investment opportunity and anyone who can identify this kind of franchise at the right time could hit the jackpot.

The disadvantages of low-cost franchises

However, there are some potential disadvantages to low-cost franchises. These include;

  • No support A franchisor who is receiving little in the way of franchise fees may not deem it worth their time and effort to offer the necessary support and guidance.
  • Competing on low costs A franchisor may only be competitive based on their low prices. When this happens, generally it means that the business isn't founded on a healthy business plan, product, or service and it wont last for long. The vast majority of franchises like this are imitating a more successful franchise idea.
  • Not a sound business idea Finally, a franchise may be low cost because it just isn't all that profitable.

What to look out for in a low-cost franchise

When youre browsing through low-cost franchise opportunities, it can be difficult to know what an excellent opportunity is and what's likely to end up a flop. Before you make any decision about which franchise youd like to sign up with, make sure you ask yourself the five following questions.

  1. Is there a demand for the product or service this franchise provides?
  2. Are there competitors that do this better?
  3. Has the franchise managed to establish any brand recognition?
  4. Does the franchise offer initial training and ongoing support and assistance?
  5. Can this franchise grow and develop if I put work into it?

These five questions should form the basis of your low-cost franchise decision. Though theres plenty more to think about, any franchise that youre considering investing in should at least meet these minimum requirements.

Conclusion
As with any business model, there are those that do low-cost franchising well and those that don't. While some low-cost franchises are an excellent opportunity, others will never return the levels of profit you desire or expect. Consequently, its necessary to consider your options extremely carefully and not rush into a decision based only on cost.

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