​Why Franchise Investments Can Beat the Stock Market

Christopher Conner  |

I have invested in the stock market since 1999 and been in some cases an active investor in stocks. I went through the learning curve that many inexperienced investors went through where, in my poor judgement, thought that I could actually beat the market. I obviously could not beat the market, and at some point just accepted the fact that if I were to continue investing in the stock market, I just need to be happy with a 6% return and not waste time or money trying to day trade.

As I have progressed in my business acumen and experience, our firm has invested in several franchises and small businesses and been able to realize the returns of owning a small business franchise. Once this transition took place, a funny thing happened, you realize how much better of a return you can generate when you are in charge of what happens in the business. Someone said to me, in reality, even if you had the opportunity to meet Bill Gates and ask him questions about what was happening with Microsoft (MSFT) stock, you still wouldn’t really KNOW what was going on in the day to day operations of Microsoft….and you definitely wouldn’t have any degree of control.

When you invest in a franchise or small business, you have complete control over your investment. Sometimes this isn’t a good thing for an investor, but if you are someone who is motivated, experienced and has a plan for success, this can be a very good thing.

Our firm helps businesses develop franchises and take brands to market, many times, a franchise opportunity can offer an investor a return in the 100’s of % ROI on the investment. In fact, a franchise is generally not recommended to a new buyer if they are not able to see a 25% or higher return on their cash investment by the end of the second year alone. What stock could you possibly invest in that offers a reasonable expectation of these types of returns?

Sure, some stocks have shown these returns, but the odds of finding the right one to invest in are pretty slim unless you have Gordon Gecko’s type of insight to the market trends. The difference is control. When you invest in a franchise or a small business opportunity, you control all aspects of revenue production, operational expenses and how big the upside is for the business. There are multiple types of business ownership out there, none are better than others, just different. The traditional business type would be the owner-operator model where the investor is also the operator. These businesses are ones where the owner literally “lives” in the business and works every day, every minute and every night.

As you might imagine, the owner-operator model generally has the quickest return and the highest success rate because the person who cares most about the success of the business is in it every day. The second type of business ownership is that of an investor-model where the owner makes an investment in the business and hires staff, management and personnel to manage the day to day business. The investor model requires more capital, has a higher failure rate and requires a strong operating system to make it work, but the upside is typically higher due to the fact that the owner has an aptitude and willingness to scale. In either case, the opportunity for return far exceeds what one would typically realize by investing in the stock market.

It all comes down to risk vs. reward. In any stock market investment, you’ve heard it many times, the highest return comes from the highest risk stocks. Ford Motor Company (F) isn’t going to pay an enormous return, because there is pretty low risk that they go out of business. When considering a small business investment, the risk is generally high which fits this paradigm as the reward is significantly higher as well. If you haven’t seen the statistics before, the SBA quotes that 96% of all small businesses in the U.S. fail in five years from opening.

Quite a disappointing statistic, but that is where good planning, market research and franchising. A very smart business person once said to me, every business move carries some degree of risk, the key to making good business decisions is to work only with SMART risk. Through planning, market research and good franchise systems, risk can be mitigated and managed to minimize the chance of failure and maximize potential returns. Franchise systems have a much higher success rate in general and with the right systems there is significant potential for scale within the model.

For example, many franchisees of well-managed franchises own 10, 20 or even hundreds of franchises. Once the model was integrated and successfully opened, the franchisee duplicated the model many times over. For this reason, most of the business investments that we have taken part in were franchise systems that allowed for a simpler operating model, easier ramp up and a quicker potential ROI on the investment.

Regardless of whether the route to small business ownership is a franchise, pure entrepreneurship a partnership or some other form of investment, my bet is on having control over your investment. Being able to manage the business and having the opportunity to create profitability through your own efforts and commitment makes all the difference in the world. My advice, put your IRA or 401k money in the stock market, anything else, put into yourself and a small business or franchise.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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