According to a recent market study, in 2023, the franchise marketplace is projected to hit an impressive CAGR of 9.73%. What does that really mean for the average franchisor (seller) and the franchise buyer?
The franchise marketplace is divided into industry segments, key players, and regional demands. More than ever, evaluating market threats and opportunities using a SWOT Analysis is necessary to enable sellers to plan strategic thrusts that meet the buyer’s demand.
In the United States, there are approximately 4,000 franchise brand options for the buyer when choosing a franchise concept. It really boils down to two groups. Brands under $250,000 are “all-in” and brands greater than $500,000 are typically brick-and-mortar. The average franchise buyer is in the $250,000 range and it is often brand area developers that seek brands greater than $500,000. Mostly, it comes down to access to capital and credit.
If we look at franchising as one path to wealth. CAGR is one method for return on the investment portfolio. This is an institutional mindset whereby we partner with financial organizations that are judged by return “ON” capital and CAGR matters. However, for the smaller franchise owner, it is more the return “OF” capital that matters. For this reason, the profitability of the franchise unit or units is more important.
If you have $250,000 invested, likely you have 30% or $75,000 at risk and the balanced borrowed. Choosing the right business that can repay that $75,000 the fastest is your goal. For this reason, we recommend buying franchises with a “success profile” that has: low entry costs; high gross margin; low overhead; few moving parts; and can be diversified within a market segment.
In our next article, we will look closer at industry segments that fit this success profile and can generate wealth with minimal out-of-pocket investment.
Robert A. Needham, JD, Ph.D. has over 30 years of experience in business and franchise development. He is a published author, innovator, and strategic advisor to the franchise industry.