This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Buying a Cheap Franchise Can Get Expensive

Stocks in this article: PZZA NATH

NEW YORK ( MainStreet) -- Many franchised companies tout affordable start-up costs, but new franchisees should be careful of the difference between franchise fees and how much it may actually cost to get the business truly up and running.

Even with signs companies are starting to hire again, many entrepreneurs are turning to franchising as an alternative to corporate America.

Concepts that don't require a lot of money to establish, such as home-based businesses, are particularly popular.

"We expect the interest on lower-cost franchises to remain high in 2012," says Franchise Gator's general manager, Farrah Kennedy. "While a lot of these franchises are not as sexy as the more expensive food or retail, they often have better margins and allow for a great work-life balance. For someone just starting out on their entrepreneurial journey, these can be a great starting point to learn the ins and outs of running a business, manage employees, etc., and good income for a sole proprietor."

Besides home-based businesses, there are many franchises with more than one type of store or concept available for sale -- for varying start-up costs. But new investors and franchisees need to watch out for the difference between initial franchise fees and the total investment needed to get the business properly running.

The start-up expense is the amount of money required for a franchisee to open and operate a location for at least three months. That may not be reflective of the total investment required, though, which includes such things as real estate leases, operating capital and marketing costs.

It's also important to match a proprietor's risk level and cash and financing availability to an appropriate concept. (Most franchises have a minimum net worth requirement and liquid asset requirement for new franchisees.)

Potential franchisees shouldn't just jump into any name. Just because the company may have low start-up costs doesn't mean they are reputable. Before putting down money, franchisees should make sure the company has a "proven system" that has been easily replicated and successful in different scenarios, Kennedy says.

"A franchise is not a guarantee of success, so make sure you can bear the risk," she says.

If you are an existing operator or can be extremely frugal, these five companies are reputable and require less than $20,000 to get started, according to the International Franchise Association.

1 of 6

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,445.10 +57.89 0.33%
S&P 500 2,030.41 +0.86 0.04%
NASDAQ 4,694.0560 +12.5590 0.27%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs