Passive Income Franchises Explained
Should you buy a franchiseA franchise is when a business (franchisor) allows a party (franchisee) to acquire its know-how, procedures, processes, trademarks, intellectual property, use of its business model, brand and rights to sell its products and services. The franchisee signs a contract (franchise agreement) with the franchisor to acquire the franchise and generally has a territory granted to operate. What is a Franchise?… More for sale even if you have a day job?
Patrick Findaro here, co-founder at Vetted Biz and Visa Franchise. Today I wanna talk a little bit about semi-absentee as well as passive income franchises, and go over a few of the myths, and what these business opportunities are all about. So, to be very straightforward, there is no passive franchise investment that I’m aware of where you’re owning 100% of a franchise business, and you don’t have to do anything. If you’re looking for exposure and investing in a franchise, we are not investment advisors, but you might wanna look at investing in different…we are not investment advisors, but you might wanna look at getting exposure and investing in publicly traded franchises, where you truly are not doing anything, and it’s money that’s in different publicly traded franchise stocks and you do not have to review any financials…
There are No Passive Income Franchises
So, in terms of passive income franchises, there are none. If you’re looking to have passive income generated by franchises, there are franchisors that are publicly traded, there are multi-unit and multi-brand, even, franchisees that you can also purchase their stocks, and that would be more of a passive income franchise. And in terms of semi-absentee, a lot of people in the franchise arena describe a semi-absentee opportunity where you’re not working day-to-day in the business, and you generally would have a day-to-day manager that’s responsible for marketing, salesThe total amount in dollars made in the business before expenses are deducted. See also Gross Revenue…., client service, the general operations, day-to-day communications with the franchisor themselves, training employees, etc. Where the semi-absentee franchise owner might be more responsible for making sure the bi-monthly payroll works all right, and checking the financial numbers, going over the financials and strategy with the day-to-day manager, filling in for the day-to-day manager if he or she is sick, those are some of the responsibilities for a semi-absentee franchise owner.
Semi Absentee Franchises NOT Passive Income Franchises
Semi Absentee Franchise Opportunities Generally Require Investing $200,000 or More
Now, that being said, we see semi-absentee franchise owners still working anywhere from 5 to 20 hours a week. And it’s a type of role that you still have to be expected from time to time to roll up your sleeves. Unless it’s a very sizable business and your franchise location is doing over a million dollars in sales, or you have multiple locations where you have a regional manager you’re paying $80,000-$90,000 a year, that’s able to handle not just the marketing, sales, general operations, but also the back-office functions, and you’re really just sitting back and just working, you know, 1 hour a week, a couple hours a week. That being said, there are some options available where again, these are for higher investment amounts, generally over a $200,000 investment, where there’s enough margin for a day-to-day operator, as well as you can even have an agreement with the franchisor where they’re managing some of the day-to-day functions, and you could work as little as 1 or 2 hours a month.
Full-time Franchise Owners Must Invest $50,000 to $150,000+
However, these opportunities are generally for businesses that are already up and operating, or they’re for high margin businesses where the franchisor is very confident in what they’re able to do, and maybe it’s a smaller franchise system that’s able to be a little more actively involved with those 2 investors that are looking to make an investment in a business that they own a majority stake, generally 100% of the business, but that the franchisor would be working…be responsible for supporting that day-to-day manager, and really be much more hands-on than a typical franchisor that’s providing support with the branding, negotiating with lenders, with the vendors, and just negotiating with different third parties to help the franchisee, and generally, franchisors are not getting as involved with the day-to-day operations of the business. So, how we see it, you know, I haven’t found a semi-absentee opportunity for less than $150k.
Under $150k, you can really expect to work full-time in the business, 40, 50, 60 hours a week for the first 12 to 18 months. If you’re willing to invest between $150k and $200k from day 1, there might be an opportunity to have a full-time manager in place without investing additional capital. And for that, you’d be looking to still work 5 to 10 hours a week, even some weeks, especially if there’s turnover with that day-to-day manager, you could work substantially more hours in the business. Keep in mind the profit margin will be pretty low for the first 12-18 months as the business scales up. Vetted Biz recommends you work 40+ hours a week for atleast the first year in any business (even above $200,000) that you are looking to eventually substitute your current earningsTotal earnings received by a business based on the U.S. Income Tax Return. The financial numbers of these earnings depend on the type of business, but can include income, guaranteed payments, compensation, interest, depreciation, elective deferrals, and contributions.For further details on how to calculate earnings and where to find financial numbers on tax return forms based on the type of…. Then, you can always hire a day-to-day manager after the business is bringing in $5,000+ of cash flowThe net profit before taxes plus payments to the owner(s), interest, and depreciation of assets…..
Franchisor/ Consultant/ Manager Operational Support >$200,000
And then above $200,000, there are a few different franchisors, and they generally have anywhere from 5 to 100 locations, and they have corporate locations, where they can help you and offer sort of operational support arrangements so they can support the day-to-day operations, and you’re more there as an investor. And there’s financial controls that you should have in place, including access to the point of sale software, and other safeguards in place so you could check how the franchise is doing on a day-to-day basis, but having an agreement in place with a consultant, an operational consultant, the franchisor themselves or related entity to manage the day-to-day affairs, and work less than five hours a week, should you wanna do that.
All that being said, keep in mind that when you’re investing in 1 franchise, whether you’re working 1 hour a month, or you’re working 100 hours a week, it’s significant risk. And the last study provided by the U.S. Chamber of Commerce is that 1 in 2 businesses will fail after a 5-year period. And only 30% make it to the 10-year mark. So, that’s for businesses that have employees that are operating in the United States. Franchises do not do so much better or so much worse than those statistics, but there are some franchise brands where their track record of success is 98%, 99%.
So, it’s really important that you choose the right franchise. And especially if you’re investing a significant amount of your net worthValue of all the non-financial and financial assets of a business buyer. There is usually a minimum net worth requirement to qualify as a franchisee and for bank financing…. in this business, we recommend that you work full time in it, really understand the systems and have full ownership and control over the business, so you can eventually hire your own day-to-day manager, but making sure that what you’re investing in your time and money is as safe as possible because you as the owner, no one’s gonna care more about your business success than you. So, keep that in mind. You know, for those that, you know, are looking to invest all their net worth in a franchise, be very careful and get your information not just from the person selling you a franchise but on the public domain. At Vetted Biz, we produce a lot of reports on SBA loan default rates, franchise failures, looking at franchise terminations, looking at franchises that cease operations, and all these different information to really tell if a franchise has a historic track record of success, or if they have a historic track record of failure.
Check Franchise Track Record
So, if you’re investing your time and money in a business, especially if it’s a big percentage of your net worth, you better be quite sure that you make the right decision, and you have the right data to back up your decision. So, that was meant as a primer on understanding that there is no truly passive income franchise. Every franchise that you invest and you own 100% of, there will be involvement from you as the owner. And when you get from $100k to $150k, there becomes opportunities that you do not have to work day-to-day in the business and there’s margin for a day-to-day manager. And then once you pass $200k as initial upfront investment, and generally for businesses that are generating hundreds or thousand of dollars of revenue, you can pay a manager more money, or even have a…engage a operational consultant, or engage the franchisor, an entity related to the franchisor to manage the day-to-day operations as well as the day-to-day affairs of the business. This has been Patrick Findaro. Hope you enjoyed our video today.
