Financial freedom isn’t just about saving. You have to invest as well. Investing is about buying assets, in other words, things which entitle you to a claim on cash flows. The only way you get true financial independence if not wealth, is you detach your income from your active work and earn passive income. If you have to work a certain number of hours to earn money, then there’s a limit to how much you can earn. However, if you can get your money to work for even when you’re not doing anything, then you can achieve true financial independence and maybe even become wealthy. One of the best ways to do this is through passive franchise investing. Here’s how.
Quantify Your Expectations
So many investors skip this step. You have to be very clear about the kinds of returns you are looking for, the timeframe you want a return on your money, and the risk levels you are willing to accept. You also have to be clear about the red lines that, if crossed, will trigger your exit from an investment. When you have these clear ideas, it makes it easier to make decisions in the moment.
Find a Franchise That Creates Value
Value is a benefit that people derive from something. If you can make money from something, that means that value has been created and exchanged. However, value is very hard to translate into reality and different franchises have different values and some have no value at all. Financially, this translates to different rates of return on investment. For instance, a haircare location can earn a rate of return of 27% to 33%, compared to 43% to 99% for a fitness location, for example.
Know Your Circle of Competence
According to Warren Buffett, every investor needs to be able to “correctly evaluate selected businesses”. An investor does not have to understand every business in the world, or even many kinds of businesses. “You only have to be able to evaluate companies within your circle of competence”. Understanding the boundaries of your circle of competence is fundamental to being a good investor. So, as you enter the world of passive franchise investing, you have to have clear ideas about what kinds of businesses you can evaluate. Stick within your circle of competence. For instance, veterinarians could leverage their knowledge of animals to invest in pet companies.
Find a Franchise Platform
A franchise platform is an online tool that matches investors like yourself with franchise opportunities seeking investment.
A platform will look for the best franchise opportunities and exclude those that do not meet their investment criteria. This cuts down on the time you would have to spend looking for opportunities yourself.
A platform may also buy shares in bulk, which will significantly reduce the purchase price.
A platform will have the tools to conduct extensive due diligence before a franchise opportunity is presented to you.
Diversify Your Portfolio, But Not Too Much
You should diversify your portfolio so that your risk isn’t all in one franchise. However, you shouldn’t diversify too much because it will make it hard to keep abreast of what’s going on in the franchises you are invested in. More than 5 franchises is probably too much. Just one franchise is too risky.