Invest Cheaply, Yet Earn Well Through Franchising

May 2, 2012

Investing in inexpensive franchises to earn a profit is a common strategy among entrepreneurs. Inexperienced business people make the mistake of deciding which franchise to invest in based solely on initial cost. Smart entrepreneurs know that cheap franchises are a combination of low initial cost to purchase, low overhead and high profit-margins.

Cheap franchises include attractive businesses that are utilized by all types of consumers. Entrepreneurs can start franchises to operate pizza restaurants, internet businesses, dry cleaners and coffee shops. What do these businesses have in common? Low initial investment and low overhead compared to traditional businesses. Let’s explore in more detail why cheap franchises have the potential to earn major profits.

Inexpensive franchises save money on ongoing staff costs. Staff costs are either substantially reduced, or eliminated altogether if the business can be run with one person. For example, a dry cleaning franchise that offers door-to-door pick up and drop off services may only require one driver to service a large area. A mobile computer support franchise may employ several technicians, and no requirements to lease or rent office space. Remember that avoiding high staff costs saves more than just hourly payroll cost. Full-time employees require benefits as well, which will be factored into the total wages. In addition to medical insurance, having a large number of staff can also require more liability insurance coverage.

Overhead is expensive for businesses everywhere. Overhead includes a variety of indirect costs that do not generate profit for the franchisee. Items included in the overhead are rent, utilities, insurance, legal fees, account fees and advertising. Because overhead can account for between 13 to 50 percent of total business costs, keeping it low is critical to maintaining profit.

At $1.50 per square foot, the price of leasing or renting space can be a large percentage of monthly expenses. Overhead also includes the cost of utilities like phone, electricity, gas, water, heating, and cooling. In addition to keeping the lights on, franchises also must expend money on insurance, legal fees and account fees. Cheap franchises keep these costs low by not requiring brick-and-mortar office space, or finding ways to operate within a much smaller square footage.

A cheap franchise can earn major profit by offering products with high profit-margins. Coffee shops are an excellent example. Coffee costs the business about 50 cents per cup — 20 cents for the coffee, 20 cents for the milk, and 10 cents for the cup. Coffee houses average a profit margin of 200 to 300 percent, because consumers are willing to pay the price for convenience.

Another way to earn major profit is to invest in more than one low-cost franchise and operate them concurrently. The franchises do not have to be industry-related, but it is helpful if they are located near each other for your purposes as a manager.

Investing in a cheap franchise is smart because you save money on overhead, initial investment cost is low, and products have high profit-margins. These factors keep operating costs low, which is critical to survive economic ups and downs. Low-cost franchises also offer fun opportunities in businesses like pizza restaurants and coffee shops.

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