Creating your own business is one of the best investments you could do long term. A good business can sustain tough market times much better than the financial assets like stocks and mutual funds. The business can bring higher income than the investments in financial instruments or real estate.

Photo by Sin Agua at Flickr

Unfortunately building your own business is much harder than investing in ready assets. Building a business may require a lot of time, passion, knowledge and startup funds. Finally, the chances for a new business to fail and end up as 100% loss are fairly big. And wait, building a business requires hard work – exactly the thing most people want to avoid.

Is Buying a Franchise Business The Way To Solve These Problems?

The franchise business model have some great advantages which may make it attractive option if you are not passionate about building a business from scratch.

• High success rate. A quick search online shows that most franchise businesses declare a success rate of 90% or more. This means only 10% of the franchise startups go bankrupt in the first few years of operation. Compared to the failure rate of the “normal” businesses this is several times better.
• There are less things to go wrong. Buying a franchise is good for you if you don’t have much experience in building your own business. Since you are receiving instructions and guidance from the franchise provider, there are much less things you need to worry about.
• You save a lot on advertising. Most franchise chains advertise their products and services worldwide. By using their brands you don’t need to work that much on getting known and recognized.

Of course, buying a franchise has its disadvantages – the main one is usually the high startup cost and royalty fees. Compared to what you get in exchange however this is not a big concern if you buy a good franchise. The startup costs to build a business from scratch can be much higher if you have to invest in branding yourself.

How Can You Invest In A Franchise Successfully?

The first thing to do before buying a franchise is to find one that suits you. A franchise is only as good as it can fit your specific personal requirements and geographical characteristics. A Subway franchise may be great for many, but it may not work that well if physically situated at the corner behind McDonalds and KFC.

Pick a franchise in a business niche that you understand or at least would like to learn more about. A big share of the franchises are in the fast food/drinks niche, but not everyone wants or know how to manage a fast food business. If you are an architect or engineer you may do better with a real estate related franchise.

As the Web grows, there are many web based franchise opportunities offered now. Some of them are quite tempting because there are no high costs of starting one. But because of that and the global economy of the web (there are no regional limits to any franchiser except eventually the language) there is too much competition in these franchise models. Besides that the web offers very low barrier to everyone to run a business and offer franchising so a lot of these opportunities are of low quality or plain scams.

Once you carefully select the franchise, you must have the funds for buying it and for buying/renting any real estate and equipment that’s required. The good news is that banks and other credit institutions are usually more inclined to give loans to franchisers rather than to plain business startups. So, financing a franchise may not be as hard as it may look.

Although franchising gives you less chance to be creative and less in it depends on you, don’t expect the business to run on its own. If you want to have long term success you need to learn about your new business all the time, to experiment on local advertising, service improvement and customer relations. As long as you are allowed by the franchise provider to do any improvements, experiment with doing them so you can stand out compared to the other franchisers in your area.

Limiting The Risks

Ten percents risk of failure is not a small number especially if your business unit turns out to be within these 10%. If your location is good, if you carefully select a proven franchise, and if you have ensured the market in your area is not over saturated, you are already on the right way. But there are few more things you can do to reduce the risk of failure:

• Rent, do not buy. Long term renting will reduce your profits. But at least in the beginning you’d better avoid buying property and expensive equipment for your new business.
• Choose the best proven franchise in your niche. Do you prefer 5% chance to lose $50,000 or 10% chance to lose $120,000? I would choose the latter. Even if the proven franchise is more expensive than a less known one, you are risking less in general with the former.
• Research online. A well known franchise business will have a lot of franchisers worldwide. Research online forums and communities for other opinions, tips and advice from people who are working with your franchise provider. Many will complain about their failure online – carefully examine what kind of problems they share and see how you can avoid them.

Buying a franchise is a beaten track for these who want to start a business but don’t have much experience and don’t want to take much risks. It’s not always the best option – you could start a business from scratch for less funds, you can have more freedom and can grow more if you go by your own. Franchising is basically a deal in which you trade freedom for safety – it’s like having a job, but is one step closer to the freedom of risk.

Are all the personal finance bloggers software engineers? Maybe not, but I have three of three so far – Lazy Man is my third guest and he is also an IT fellow working in the Silicon Valley.
(If by any chance this introduction does not make sense to you, this is because you have not read the previous investor profiles on this blog).

As usual, I shoot three quick questions to Lazy Man and best of all, I got pretty interesting responses. (Oh and he even provided me with handy HTML – I love techies). Check them out yourself:

SI: What’s the lazy way to reaching 2.25 millions net worth? Have you calculated when you are going to reach it with the current pace and why exactly 2.25M?

I’ll take the easier question first. I calculate how much money I can make off of dividends. If I had $1.25M and could expect an 8% return each year, that would give me $100,000 a year to live on. I feel that’s significant. However, due to inflation (3-4% and increasing rapidly lately), that $100,000 buys less and less. Thus, I need to assume that I’m only making a 4-5% return after inflation. If you work backwards to figure out what generates $100,000 each year at a 4-5% return, you come with a number around $2.25 million.

Now for the harder question. What’s the Lazy Way of reaching 2.25M?

There are three obvious ways:

1. Invest early and often – If you managed to scrape up $98,000 on your birth, you could invest at 5% interest (we deduct inflation and taxes again) and have your 2.25M at age 65. I realize we don’t have Suri Cruise baby pictures to bring in that $100,000, but it’s interesting to know you could finish your whole retirement with less than $100,000.
2. Be Frugal – I’ve bought a lot of things that gather dust. I never thought about it at the time, but I have around 300 CDs that I bought in college. Today, I listen to about 25 of them and turn on the free radio for the latest songs. I used to go out to restaurants and bars and that got expensive as well. Each time I save some money, I think about how much I’ve moved up my retirement date.
3. Do Something That You Love – Running Lazy Man and Money and Lazy Man and Health is a way of making money, but it’s certainly not a lazy way. There’s a lot of things to do each day, more than any non-blogger would imagine. Here’s the thing, though… for me it doesn’t feel like work. When you love to do something, it’s like playing. I like to say that Tiger Woods doesn’t work golf… he plays golf. Sure it’s a lot of work to be as good as he is, but I like to think he’s having fun out there.

SI Notes: 1. You lucky, come here to see how 23% – 24% inflation feels like!
2. I liked the fact he knows exactly how much he wants to save. Not just “be rich and make millions” like many dream.

2. How important is financial success for you? If you can live a modest but carefree life in a tropical heaven, without even needing to work, would you sacrifice your dream to be rich?

Financial success means having the freedom to live in a carefree life in a tropical heaven. I don’t know if I would do that as it doesn’t give me a sense of purpose. I like to think that I don’t need money beyond the carefree life in tropical heaven, but it’s a fantasy. My wife and I will think about starting a family at some point and we’ll need to find our children good schools. We also may need to provide financial assistance to our parents. I have a few things that are really important to me. I would like to have the money to visit and stay in Boston for extended periods – where I’ve spent 95% of life.
It’s where my friends and family are. Lastly, tropical heaven doesn’t exist if I can’t watch the Red Sox and Patriots. While I try to be frugal, I am materialistic in some ways.

SI Note: Don’t forget the mosquitoes. Tropical heavens look like heaven on pictures, because they use Photoshop to remove the mosquitoes from them. So, tropical heaven really doesn’t exist.

SI: Have you experienced any significant shifts in your views about money and investing during the years you run Lazy Man And Money? What are they?

Change happens all the time… Life is a journey and Lazy Man and Money is no different. It would be hard to state all of them in this space, but I learn more every day. When I started Lazy Man and Money, I had this vision that I would race to that $2.25M net worth and then relax in that tropical heaven you spoke of. Now I look to how can I build income streams that bring in lasting income streams. My wife is in the military and at age 42, she’ll be eligible to retire with a small, but significant, government pension (which adjusts for inflation).
Let’s go back to the original $100,000 a year goal… With her pension, plus earnings from Lazy Man Media, some investments (401K, Roth IRAs to boost us in our later years), and rental property income (my wife and I each owned condos when we met) we might have a large part of $100,000 accomplished without a huge net worth.

SI Note: Sounds like a great plan. Do you see how people achieve their dreams without buying “get rich quick” books? Of course, it takes good income and discipline, but it’s doable for anyone.

The Lazy Man (and his money) sounds like a smart guy, what do you think? I would definitely browse the archives of his blog for some of the best posts and subscribe by RSS not to miss the further publications. (Actually I am already subscribed, so this was a hint for you).