Balance Your Portfolio: Variety Mitigates Risk and Enhances Growth

Diversification is a key strategy for mitigating risks and enhancing growth opportunities. By investing in various franchise sectors or categories, an owner can balance the company’s portfolio, tap into different market demands, safeguard against industry-specific downturns, and potentially bring in outside capital for specific brands or segments of the portfolio.

Understanding diversification

The franchise industry offers a variety of businesses operating under a similar structure. Diversifying your investment in different types of franchise businesses will spread risk and increase potential returns. By venturing into various sectors, franchisees can protect themselves from market volatility affecting any single industry. This strategy stabilizes income and opens avenues for growth and resilience.

Food

Food franchises dominate the franchise industry due to their longtime leadership in the franchise model, widespread appeal, and consistent consumer demand. The sector is incredibly diverse, ranging from fast-food giants to high-end dining establishments. Subsectors within food franchises include QSR, fast-casual, and full-service restaurants. Food franchises benefit from high consumer demand and established brand loyalty. However, they face intense competition and complex operational requirements, including inventory management and staffing.

Non-food

Non-food franchises include services and retail. These franchises often cater to essential needs and lifestyle improvements. Options include:

• Fitness and wellness. Brands cater to a wide range of consumers, starting with thinly staffed DIY brands to centers offering a variety of high-end services at full and premium prices. Front-end costs vary. Fitness brands focus on health and well-being, reflecting a growing trend toward personal fitness, and target every feasible demographic.
• Education and tutoring. Increasingly, parents prioritize investing in their children’s educations. Services focus on math, writing skills, language, testing, and foreign languages. Education and learning services will continue to grow and provide services sought by parents aiming to enhance their children’s learning.
• Home services. Franchises include cleaning services, home repair, and preventive maintenance. These franchises are typically labor focused and territory based with lower up-front investments than traditional brick-and-mortar locations. Services focus on consumers who need trusted service providers to manage household tasks.
• Retail. Many well-known brands are franchised. Look for business models that perform well in good and bad times. Fads generally offer profit only for early entrants into a space or brand.

Non-food franchises often tap into stable or growing markets and don’t directly compete with food services. However, they may face challenges related to market saturation, evolving consumer preferences, and competition with local small businesses.

Emerging

Emerging franchises offer high-growth potential, but there’s an elevated risk of failure. These businesses often capitalize on technological advancements. Current trends include automated services, eco-friendliness, personalized services, and new health trends, such as those specializing in mental health, holistic therapies, and alternative medicine.

Legacy

Legacy franchises are well established with long histories and proven track records. They offer stability and consistent performance. These franchises have been market leaders for decades, offering reliability and brand strength. They benefit from strong brand recognition and loyal customer bases.

However, they may need to modernize to stay relevant and compete with newer, more innovative brands. Additionally, investors seeking to join these brands will see more expensive price tags for existing networks than for other brands. Investors can also expect limited opportunities for expansion in core markets as well as higher up-front and ongoing capital costs.

Strategic tips

When considering a potential investment in a new franchise, evaluate your financial goals, risk tolerance, and personal interests to choose the right franchise types for your portfolio. Conduct thorough research on each franchise opportunity, including market trends, financial performance, and operational requirements. When balancing your portfolio, aim for a mix of franchise types and sectors to reduce risk and maximize growth potential. Look at opportunities close to existing operations, which can help with oversight and growth. Consider factors like market stability, consumer demand, and operational complexity and keep up with industry trends and emerging opportunities to make informed investment decisions and adapt to changing market conditions.

Most importantly, research the brand. Talk to other franchisees. Talk to successful and failed operators. Get to know the owners. Are they founders, investors, or private equity owners? Understand the brand’s finances and growth plans.

Diversifying your franchise portfolio can enhance your investment strategy and provide a stable foundation for growth. By exploring various franchise types and staying informed about industry trends, you can build a resilient and profitable portfolio. Investing in different franchise types can create long-term success and stability in the dynamic franchise industry.

Tori Wagner is a vice president with C Squared Advisors, an advisory firm that focuses on multi-unit franchisees and franchisors. She has worked with franchisees for more than a decade, advising clients through M&A transactions as well as raising debt and equity capital to support strategic initiatives. Contact her at 508-769-0097 or tori@c2advisorygroup.com.