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How Do I Choose the Best Franchise Investment?

Fast food franchises are a popular investment option.
Hotel chains offer franchise investment opportunities.
Article Details
  • Written By: Osmand Vitez
  • Edited By: Kristen Osborne
  • Last Modified Date: 05 November 2014
  • Copyright Protected:
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A franchise investment is a type of business model. Entrepreneurs make financial investments into franchise companies in return for operating a franchisee location. A franchisee is able to sell goods or services developed by another company. The investment gives entrepreneurs a specific set of rights for operating under the franchise corporation’s brand name. Several types of franchise investments exist in the business environment. Entrepreneurs must carefully review the available franchises and select the one that makes the best financial sense.

Entrepreneurs can make a franchise investment in a wide variety of business industries. Top franchises include fast food, convenience stores, hospitality, personal service, tax preparation and cleaning industries. This variety allows entrepreneurs to carefully select the franchise investment that will provide the highest rate of return for invested capital. Entrepreneurs should carefully consider the amount of money they must invest when starting a franchise business investment.

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Franchise companies usually require entrepreneurs to put up significant amounts of capital when investing in a new franchise location. High capital investments are usually required so franchise companies can ensure entrepreneurs are committed to making the new franchisee location a success. Many franchise companies require entrepreneurs to obtain external financing when making this investment. A few franchisors may offer to hold the initial financing for new entrepreneurs. However, entrepreneurs may still need to provide a portion of the financing. The amount of financing often increases the expected rate of return entrepreneurs need to earn in order for the franchise to be profitable.

Entrepreneurs should also pay close attention to the fees and royalties franchise companies charge each franchisee. Fees and royalties are usually paid on a monthly basis from each franchisee location. Many franchise companies charge royalties on the amount of gross sales or net income from a franchise location. Other times, franchise companies charge of a fixed fee regardless of the franchisee's income. This money pays for the ancillary or management services each franchisee receives from the franchisor. Franchise fees and royalties reduce the amount of income an entrepreneur can earn in a franchise investment. These must also be paid regardless of how well the franchisee generates revenue.

Additional services or perks are another item to consider when selecting a franchise investment. Franchising companies usually offer management consulting, payroll, accounting and other various business services to franchisees. These benefits help franchisees get a good start when creating successful business operations in the economic marketplace. The amount of franchisees within a certain geographical range is also an important consideration. Too many franchise locations close together can drive down each location's operational profits.

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