Franchise Evaluation

How to Evaluate Franchises for the E-2 Visa?

By Patrick Findaro from Visa Franchise

There is heighten interest in the E-2 investor visa in light of the EB-5 investor visa’s significant increase from $500,000 to $900,000. Many immigrant investors who might have been able to invest $500,000 in a passive real estate investment do not have the financial resources to meet the increased amount of $900,000. Franchises have long been a popular option for E-2 visa investors.

As more franchisors see the benefits of working with foreign national entrepreneurs, there are more and more franchises that fit well under the E-2 visa criteria. Much of the immigration requirements overlap with the criteria that any perspective investor should measure when evaluating a franchise. Fundamental questions like will the business be around in 5 years and what is the marginality of the business. We will review the top four items E-2 visa investors should consider when evaluating franchise investments.

1. Understand the Profit Margin of the Business

The first question we generally are asked at Visa Franchise is “What is the profit for a certain franchise or how much money can I make?” Many franchisors will disclose the sales figures in Item 19 of the franchise disclosure document (FDD); however, less than 25% provide information on the profit margin. Those that do disclose the profit margin tend to focus on the operating margin. They rarely disclose the net income (or profit margin) as this can vary depending on if the franchisee has loan interest expenses, major depreciation on franchise equipment as well as a wide set of other factors.

A good starting point is to understand the general profit margin for a given franchise industry through online research and speaking with a franchise advisor. Then through discussions with the franchisors and franchisees in the franchise system, a general parameter can be established for how your business might look in the first and second years of operation.

One franchisee that works full-time in a tutoring franchise might have a 30%+ net profit margin and earn $85,000 per year. When on the other hand, another franchisee working 5-10 hours a week with a full-time manager might expect a net profit margin closer to 15% and earn $40,000 per year.

2. Decide your Involvement in the Franchise from Pre-Opening to One Year in Business

Building on the above example, it is important to understand how involved you plan to be in the business and if your spouse or other family members will also provide support. For most franchise investments under $200,000, the owner is expected to work 30-50 hours a week for the first 12 to 18 months to ensure the business starts with success and is on an upward trajectory.

If you plan to invest $150,000 and only want to work 10 hours a week, under most franchise models your business will struggle to turn a profit. Furthermore, unprofitable businesses can lose their eligibility for the E-2 visa as there is a marginality requirement where the business must provide partial income support for the E-2 visa investor’s family as well as contribute to the local economy. It is important to have realistic expectations based on past financial performance of other franchisees and understand the upfront and ongoing time commitments of those franchisees.

3. Investigate the Franchise Company and Its Principals

How does the franchise company make money? Is the majority of their income derived from franchise sales? OR is most of the income earned by providing ongoing support to franchisees aiming to increase their sales and thus gain more royalties? It is important to understand who the owners of the franchise system are and why the model they developed is well positioned for franchising.

Most franchises we advise our clients on have been in existence for 10+ years and they had 3 to 5+ corporate locations before soliciting franchisees to join their system. Franchising is a federally regulated industry and it is also regulated in many states (such as California and Maryland). The FDD is required to disclose any current and past lawsuits against the franchisor or its principals. Also, it must disclose if the franchisor and/or principals ever declared bankruptcy.

4. Beware of the Franchise Resale that Looks Too Good

Many E-2 visa investors start looking for businesses with a local business broker or on an online portal like BizBuySell. Generally, when franchise businesses for sale are publicly available, they have already been passed by the franchisor, other franchisees, friends and family, etc. It is important to understand what the reason is for the franchise resale.

If a franchise for sale claims $150,000 in profits and is listed for sale at $200,000, there are most likely major details that the seller is omitting. This could be that the lease expires in one year and there will be major costs associated to relocating the business. As another example is that three family members are working in the business and no one is taking a salary! A perspective buyer might only find out these facts after engaging an accountant to run a financial due diligence costing the potential buyer $2,000-$3,000+ each time a business is evaluated!

Conclusion

In comparison to an investment in real estate or the stock market, a franchise investment might require a significant portion of your working hours. Time is our most valuable asset and it is important to conduct you research and evaluation upfront to avoid costly mistakes. Do not be shy in speaking with multiple franchises and at least three franchisees for the franchises that you are seriously considering investment in.

About Visa Franchise

At Visa Franchise, we simplify the process for entrepreneurs to reside legally in the U.S. We do this by analyzing the best businesses for our clients and their families based on their own unique profile. Franchises time after time prove to be the best option for most of our clients who prioritize business longevity and consistency over short-term profits.

We understand each entrepreneur’s investment goals, desired location, and industries of interest, among a variety of important factors, in order to find the best U.S. business opportunities for them and their family.

We have advised 300+ entrepreneurs from over 50 countries around the world achieve their dream of owning a business and moving to the U.S. Reach out to Visa Franchise today by phone (1-888-550-7556) or email (info@visafranchise.com) to schedule a free consultation.

Share this: