Introduction to Franchise Business Opportunities and Risks
Caroline McDavid and her husband started South Carolina-based franchise business Juiced Fuel in 2022 to take that pesky stop at the gas station out of people’s day. They’ll come to you, top off your tank, and be on their way. There’s no real estate involved, no fancy office space, or hiring fairs to contend with. Just a truck and the ability to find people willing to pay to have done what most of us do – albeit grudgingly – on our own.
The fees involved upfront for a Juiced Fuel franchise are $59,500, plus a truck, which usually ends up putting the initial costs at closer to $100,000 to start.
“I hear all the time that people have been burned by franchises and strive to make sure people are not forced into paying something they weren’t aware of. This is a new concept, very important for this to be successful. Our brand, baby we created,” McDavid said.
Juiced Fuel has sold 19 territories from Kansas to Kentucky to the Carolinas. Their flagship business based in Charleston has made over $1 million since it first opened.
Mobile-First Businesses and Low-Cost Franchises
Juiced Fuel represents a relatively recent trend in franchising: mobile-first businesses that leverage smartphones and apps to deliver services directly to customers. These franchises often center around filling in the gaps in a customer’s life whether it be dog poop scooping, mobile car detailing, cleaning dryer vents or, fueling up your car.
There have always been what are described as “low-cost” franchises — there is no precise definition as some businesses tagged with the description require as little as $10,000-$15,000, while the International Franchise Association typically cites those requiring under $100,000 to start. According to the IFA, they continue to grow, with home-based and mobile franchises leading this category.
“We’re seeing a significant rise in emerging franchise opportunities across sectors like pet services, tutoring, mobile car detailing, fitness coaching, home services, and even wellness,” said Brian Luciani, chief growth officer at SMB Franchise Advisors. He says these are all built on the premise and promise of leveraging the flexibility and low overhead of a lean model while still providing a solid franchise support system behind them.
Challenges and Risks in Franchise Ownership
Lack of real estate costs are a factor in keeping the required initial investment down.
Owning a franchise is, in some respects, a classic example of the American dream. Business textbooks and websites are packed with case studies of bootstrap-pulling businessmen and women who have prospered through franchising. Often the franchising has involved golden arches, smiling colonels, or other iconic brands. Traditional franchising, though, can have an increasingly high financial barrier. Some market estimates for the cost of obtaining a McDonald’s franchise license and getting a restaurant up and running reach above $1 million. In its own materials, McDonald’s recommends a minimum of $750,000 in liquid assets to be considered as a franchisee and at least $100,000 of working capital required for each restaurant purchased.
The wide financial gap between new low-cost and existing higher cost franchise models is part of the problem, according to Keith Miller, public affairs director for the American Association of Franchisees. “It’s too easy to call yourself a franchise and imply that you are a proven business,” Miller said.
Headline Investment Numbers Don’t Tell the Whole Story
“When it comes to franchising, the headline investment number you see — typically $25,000 to $50,000 — can be very appealing, especially for first-time entrepreneurs looking for lower cost entry points to business ownership,” Luciani said. But he says that the initial franchise fee is just one piece of the economic puzzle. His firm always advises entrepreneurs to focus on the total cost of ownership: working capital, local marketing, licensing, insurance, and the time investment required to scale to profitability.
“The best franchisors are transparent about the total business costs and are committed to building sustainable systems that help franchisees succeed long-term,” Luciani said.
New, Unproven Franchise Models Often Rely on Selling Licenses
Miller says prospective franchisees are drawn in with visions of being their own boss, having a proven business model, and no experience necessary.
“The fact is, though, many of these low-cost franchises are not proven at all and the franchise company itself has little experience or financial stability,” Miller said. New franchises that call themselves “emerging brands” are often unproven and need to sell franchises to stay afloat.
A Focus on Low-Cost Alone Can Result in Failure
The history of the franchise business is full of examples of the lure of low entry costs leading to business owners getting bogged down in bigger expenses later.
Heather Lawley of Forney, Texas, owned a Jazzercise franchise, paying $1,250 for the “audition.”
Jazzercise was once a pioneer in low-cost franchising, but now competes in the space with scores of other fitness businesses. Lawley said as a franchise owner she was responsible for finding and paying for class space and advertising. When Jazzercise changed their logo a few years ago, Lawley changed and updated signage at her expense. “I am glad I am not an owner anymore,” Lawley said, adding that it was difficult to turn a profit.
Working Capital is as Important as Start-up Costs
Jenn Woodhull-Smith, a lecturer in North Carolina State University’s Poole College of Management, teaches franchising, and draws upon her own experience as a low-cost franchise owner. She owned Fun 4 Raleigh Kids, part of the Fun 4 US Kids franchise network of hyperlocal sites that cater to families, and which has an initial investment estimated in a range of $26,000-$59,000, according to Entrepreneur.com’s Franchise 500 rankings.
“With these lower cost ones, many people find them much more accessible. They can self-fund these lower-cost franchises without looking for big loans or having huge sums of money,” Woodhull-Smith said.
Look for a Franchise that Offers Experience-Based Training
Woodhull-Smith says that the appeal of a franchise, even at – or maybe especially at – the sub-$100,000 level is that, in theory, the corporate entity has already done the spadework. Of course, the franchisee has to carefully vet the franchisor to make sure that is the case.
In a perfect world, the franchise business founders have done the research and hard work up front and built a successful business model or they wouldn’t be in business, Woodhull-Smith said. And if the franchisor is reputable, the training provided for franchisees is invaluable.
Legal Protections in the Franchise Industry are Not Strong
Low-cost franchise models, in particular, suffer from a lack of oversight and generally less candidate vetting. While some states – Maryland, California, and Washington – look at franchise documents more closely than others, there is no formal scrutiny of businesses that want to franchise. And franchise brokers that sell franchises to prospective buyers in return for a bounty from the franchisor are unregulated.
Conclusion and Further Reading
Despite all the potential pitfalls, though, many experts are pro-franchise, citing the opportunities for entrepreneurship and growth. For those interested in learning more about franchise business opportunities and risks, there are many resources available, including the International Franchise Association and the American Association of Franchisees.
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Smart Tip for Readers
When considering a franchise opportunity, it’s essential to carefully review the franchise agreement and understand all the costs involved, including initial fees, ongoing royalties, and marketing expenses, to ensure you’re making an informed decision. Always prioritize thorough research and due diligence to avoid potential pitfalls and increase your chances of success as a franchise owner.
