I love the idea of a franchise business. You get to be a part of an established brand and can operate under a proven business model. What’s even better is that some franchises can be structured to generate passive income.
How is this done?
In most cases, all you need to do is put in place a management team that oversees day-to-day operations. And because you are part of a franchise, your managers can leverage all of the support and detailed operational processes that have been developed by the franchisor.
But not every franchise is well-suited for generating passive income. You need to analyze whether the business meets certain criteria (there are 4 questions you need to ask, which we'll cover in detail below).
We are also going to provide 7 examples of franchise types that may be compatible with generating passive income (with links to specific franchisors that look promising). They are as follows:
- Fast Food Franchises
- Fitness Franchises
- Hair Salon Franchises
- Cleaning Franchises
- Education Franchises
- Car Wash Franchises
- Laundromat Franchises
- [Plus two bonus ideas!]
We'll go into each of these types of franchises in detail, but first let's cover some introductory topics around franchising and general principles on what makes a franchise compatible with generating passive income.
If you want to skip the introductory stuff and jump ahead to the 7 passive franchise businesses, just click here.
The information contained in this post is for informational purposes only. It is not a recommendation to buy or invest, and it is not financial, investment, legal, or tax advice. You should seek the advice of a qualified professional before making any investment or other decisions relating to the topics covered by this article.
Absentee Owned Franchises and 4 Important Questions
To get passive (or mostly passive) income, you need to operate as an absentee or semi-absentee owner of your franchise. This just means you are not involved in the day-to-day operations of the business.
Most smaller franchise operations (just like most mom-and-pop businesses) are not run like this. Instead the owners run the business on a daily basis. They are referred to as owner-operators. If you want passive income, you can't do it as an owner-operator.
So we know absentee ownership is key. But if you want to know whether a given franchise can be successfully operated via absentee ownership, you need to ask the following 4 questions:
1. Does the Franchisor Allow Absentee Ownership?
This is the most important question.
If the answer is no, that pretty much rules out that particular franchise. Unfortunately, many franchisors don't allow absentee or even semi-absentee ownership. But there are some that do. It may take some digging to find them, but I have tried to short-circuit some of that work for you.
Throughout the article, I have provided links to franchises that accept (and even encourage) absentee ownership. They can be a good starting place for you.
2. Does the Franchise Generate Enough Cash Flow?
You want to own a franchise that has high cash flow (which just means you have a lot of money left over after all operating expenses have been paid). If you want a passive franchise, you want to make sure it that has enough cash flow to support a manager and employees.
If you buy a franchise that does not generate that type of cash flow, you will be an owner-operator. In that case, you did not buy a business, you bought a job.
3. Are Special Licensing or Skills Required?
You want to buy a franchise that allows you to operate the business without having any special expertise, licensing, or training (other than the training that the franchisor provides).
For example, you may need a daycare license if you want to operate an at-home childcare franchise. Or you may need a professional license if you are buying certain franchises in the health services industry.
Bottom line: The less that the business needs your skills and expertise to run daily operations properly, the more suitable it is as a passive income business.
4. Is Absentee Ownership the Prevailing Business Model?
This is important. When evaluating a franchise, look at whether many of the owners have multiple stores. If yes, then it means that the business model can probably support absentee ownership.
For example, many McDonald’s owners own multiple locations (with some owning dozens). They are clearly operating as absentee owners (or at least semi-absentee owners) and doing so successfully. Knowing that other owners are doing this should give you some confidence that you can too.
With those general principles in mind, let’s dive into some of the best franchises for passive income.
1. Fast Food Franchises
When most people think of franchises, they think fast food.
McDonald's, Burger King, Wendy’s and Subway are just a few of the very well-known franchises in this space. These franchises all have robust training programs and very detailed operations manuals, so your manager can run the operation the way it’s supposed to be run.
That means that you can generate passive income from owning these franchises once you have your team in place to handle the day-to-day operations. Of course, as with any business, you should still be overseeing the manager and making sure that the business is performing in line with your expectations.
One niche that I like in this space is frozen yogurt franchises.
These franchises are seasonal and you have to deal with that, but many of them seem to be successfully operating as absentee-run businesses. You may want to look into self-service models like Sweet Frog. The customers do most of the work. They select their container size, pull the handle on the machine to get their frozen yogurt and scoop on whatever toppings they like.
There are several near me that are staffed by one or two teenagers who mostly just handle the register.
2. Fitness Franchises
Fitness franchises are often operated via absentee ownership.
In fact, they are probably one of the most common absentee-owned franchise types. Because of this, there are many to sort through. This is a good thing. If this type of business appeals to you, do your research and find a franchise that you can afford and will help you meet your goals.
One fitness franchise that openly supports absentee ownership and has an ebook explaining its benefits is Workout Anytime.
If you are new to this, you may not want to build a new franchise location from scratch. A less risky option may be to buy an existing franchise location that has a good track record. You still get all of the benefits of franchising, but you can inherit employees that have handled day to day operations for a while and you get a proven business that is already profitable.
Bottom line: As with fast-food franchises, the key is finding good managers and skilled employees to run the fitness facility. Having a good manager is especially important here because your manager is also your main salesperson. Their ability to sell memberships is going to be critical to the growth of your business.
3. Hair Salon Franchises
This is another type of business that is often run passively.
As a general rule, you don’t need to be a licensed hairstylist to own a hair salon franchise. It’s a simple business: people walk in and your stylists provide the haircuts. No inventory management is required and the whole thing is fairly straightforward.
Just put in place solid managers to oversee your team of skilled hairstylists and you’re pretty much there.
My Salon Suite is an example of a franchise that explicitly allows for semi-absentee ownership. If you are interested in learning more about them, check them out here.
4. Cleaning Franchises
Cleaning franchises can be a great way to generate passive income and they often have lower start up costs compared to other franchise types.
Some cleaning franchises, like Maid Right, are deliberately transitioning to a semi-absentee model. If you want to learn more, check them out here.
5. Education Franchises
Education franchises can be great passive income generators, but you need to hunt around a bit to find one that allows for absentee or semi-absentee ownership. Many education franchises, such as Kumon, do not permit absentee ownership.
If you want passive income, you will need to find franchises like Club-Z that explicitly state that their owners don’t tutor or teach – they simply manage a staff of tutors. What’s better is that the business does not require a store-front and can be run from home.
This type of set-up sounds like a perfect model for passive income.
6. Car Wash Franchises
There are many car wash franchises out there that can generate passive (or semi-passive) income. In fact, car washes, like fitness centers, are very popular for absentee ownership.
If you want an example of a car wash franchise that support this type of absentee ownership model, check out Super Wash. They proudly tout their fully turn-key business model and have processes in place to make it a reality.
7. Laundromat Franchises
Laundromats are natural fits for a passive income business. After all, the machines are doing the hard work of washing and drying the clothes (with your customers doing the work of loading and unloading the clothes).
Even outside of the franchise space, a standalone laundromat can be a great option for passive income. If you want to learn more, check out my article on starting a passive laundromat in 6 easy steps.
But getting back to laundromat franchises, I found one that actually specializes in the absentee ownership model.
Check out WaveMax Laundry. They offer a soup-to-nuts laundromat solution, including finding ideal locations and helping design laundromat and pick out the right equipment for your laundromat. Their solution uses a model based on full-time attendants that will operate your business day-to-day, so you don't have to.
Two Bonus Ideas
As promised, here are two bonus ideas to consider: (1) FedEx routes and (2) bread routes. Now I admit, neither are franchises in the traditional sense, but you are working with a very well-established business and are leveraging its existing branding, infrastructure, and operations.
When you own a FedEx route, you contract with FedEx and get a territory from them. FedEx pays you for every delivery made within that territory.
I am sure you have seen FedEx delivery trucks in your neighborhood driving around. Those are not owned by FedEx, they are owned by independent operators who are running routes for them.
So you basically partner up with FedEx – they provide the packages each morning and you deliver them. You don't have to worry about customers, competition, marketing or anything else really. All you have to do is make sure the packages get delivered.
Of course, you can outsource this piece to make the business passive. This is what most FedEx route owners do.
If you want to learn more, check out my article on owning FedEx Routes for passive income.
Bread routes operate on a similar premise. You obtain a territory from Sara Lee or Arnold or some of the other major bread producers. You then sell bread (at a mark-up) to large retailers in your territory and deliver the product to them. These can include huge supermarkets and big-box retailers like Walmart and Target.
As with FedEx routes, you would need to hire the drivers to run the deliveries each day if you want the business to run passively.
If you want to learn more about this passive income opportunity, check out my beginner’s guide to buying a bread route.
So there you have it – seven great franchise business ideas (and two bonus ideas) that can generate passive income.
If you want to learn about other great passive income businesses, check out my article on businesses that run themselves. In that article, I cover some great businesses that can generate attractive levels of return without a lot of day to day involvement by the owner. Check it out here.