Understanding how much money you need to invest is a vital part of the research process of buying a franchise. But there are numerous questions you will want to have answered before committing to anything. And asking money questions will help you know the entire cost covered when starting a franchise business.
Here’s what we feel are the top six money questions to ask – and get answered – when deciding on the purchase of a franchise business:
Answer:
We put this question first because it is probably the first question you will have when considering a franchise concept. The answer will depend on many factors. But a typical franchisee doesn’t start making money until the second or third year.
You may find a range of incomes in the franchisor’s FDD (Franchise Disclosure Document), which the franchisor will provide. But this information is not mandatory, and the range may be too large to be useful.
A better way to find this information is by following these steps:
1. Talk to other existing franchisees who have been in business for several years or more.
2. Then, find out when they started seeing a profit and how much they currently make.
Remember that other factors will influence the profitability of your franchise, such as:
- your location,
- the marketing you choose to do,
- and how engaged you are in the running of the business.
2. What is the total investment required for this franchise?
Money Question Answer:
Knowing what your upfront costs will be for buying and running the business until it makes a profit is a key piece of information. You will be able to learn about these costs in a general manner from reading the estimated investment section of the FDD.
But for more specific and accurate information, you will need to talk to as many current franchisees as possible. Even then, your figures will only be an estimate of your actual costs so be sure to plan for having sufficient working capital.
3. How long will it take before I reach the break-even point with my new franchise?
Answer:
The reality is that your business will probably not make money during the start-up phase. With that, you have to build up your customers or clientele, and for most businesses that can take a period of time.
However, Franchisors will be able to give you a range of time in which most of their franchisees reach the break-even point. To be safe, plan on the longest amount of time in that range rather than the shortest time.
4. What will I need in working capital as my business begins?
Answer:
Working capital, also called operating capital, is the money you will have to put into your new business after it opens until your business starts making as much money as you are spending. It includes:
1. Operating expenses
• your lease,
• cost of employees,
• equipment and utility costs, etc
2. Personal living expenses.
Since the break-even point could take longer than expected and your expenses could be higher than expected, an extra cushion of capital is a smart idea.
5. What are my options for financing my franchise?
Money Question Answer:
There are several options for financing the purchase of a business. Here are the two most common.
1. Obtain a bank loan, which will usually need to be secured by your personal collateral (such as the equity in your home)
2. Through an SBA (Small Business Association) guarantee program, or both
Other franchisors will offer advice that will help you obtain this financing, while others require you to do this part on your own.
Some of the equipment you need can be leased, which is helpful because you will not be tying up all your cash. And leases can be secured by the assets that are being leased.
Both franchisors and banks will require you to have a portion of the amount needed in cash, often referred to as “having skin in the game.” That means that you are risking your own money, as well as the bank’s money, giving you a solid reason to make the venture successful.
Other ways to finance your franchise:
• Loans from family and friends
• By taking on a business partner who has the money required
• Financial companies
Such companies will assist you in borrowing money from your own IRA (Individual Retirement Account) or 401(k) accounts, without early withdrawal penalties, to finance a franchise business.
Whatever means of financing you use, keep in mind two things:
1) It’s never too early in the franchise research process to begin looking at your financing options
2) Having good credit and cash in the bank are always good ways to prove financial stability
6. How strong is the franchisor financially?
Answer:
It may not be the first question that comes to mind when researching a franchise opportunity, but it is a question you need to ask. A franchise company that is in a strong financial state will be able to support the franchisees and will be prepared to do the following:
• to survive over the long term,
• building the brand
• and making changes to the product/service/operating system as needed.
The franchisor’s FDD will provide you with their financial statements but if you aren’t sure what the figures mean, ask for help from your financial advisor.
Final Takeaway
Getting answers to these money questions is a critical step in your franchise research process. Take time with each and every question and talk to as many people as necessary, or better to a franchise coach. In that way, you are sure the answers you get are accurate.
Then, if the answers are acceptable to you, you can be confident that you are making the right choice in a franchise purchase.