So, you're thinking about becoming a franchisee?
Congratulations! This huge, exciting step can be a defining
moment in both your life and your financial future. The benefits
of franchising are undeniable and its ability to make dreams come
true is unrivaled. However, it can also be a major financial
commitment - it's like buying your first house, sending your kids
to college or planning for retirement, and sometimes it may even
feel like all three of these at once. To be successful, it is
vital to plan ahead, get your financial questions answered, and
have realistic expectations about the time it will take to start
seeing a profit.
So... Here are the
financial questions to ask--and get answered--before buying a
HOW MUCH CAN I MAKE WITH THIS FRANCHISE?
This is undoubtedly the single most important question you will
have and it's likely the first one you'll ask. It may also be one
of the hardest questions to get answered. Let's first look at why
this question is so hard to answer and then give you some
resources for finding that information. By law, franchisors are
not legally required or allowed to share financial performance
information unless they have verifiable earnings information on
their franchisees as a group or groups. If available, it will be
found in Item 19 of the Franchise Disclosure Document (
). It may be listed in many different formats such as average
revenue, average costs, average net profits or others. You should
count on the franchisor to help you understand how they arrived
at these numbers.
Many times it helps to make a list of your objectives,
prioritize your questions and then set out to learn the answers.
Perhaps a better question to start with is: What are my short and
long term goals? Are you trying to replace income immediately or
are you interested in building long term wealth? If you answered
"immediately replace income," then you might want to look for a
business that has the ability to generate cash quickly such as
product and/or service sales. If the business doesn't require
large investments of time, energy and dollars then a significant
portion of what you sell is immediately put to your bottom
If you are approaching this as more of a long term investment,
then searching for the business that has long term recurring
revenue streams might be for you. Make no mistake - all franchise
investments come with risks. It is your responsibility to know
what they are and understand your own risk tolerance. This will
make it easier to decide what kind of franchise is best for
The best resource for getting the money question answered is
existing franchisees, particularly those who have been in
business for several years or more. Talk to as many of these
franchisees as you can; don't be afraid to ask them when they
started seeing a profit and how they currently generate new and
profitable customers - maybe they'll even share a few insider
tips for you!
WHEN WILL I SEE A PROFIT?
The reality is that your business probably won't make money
during the start-up phase and, for the typical franchisee, this
phase lasts for the first 1-2 years. Just like any new business,
it takes time to build up your customers or clientele, find your
marketing niche and get into the groove of running a business. On
the upside, the franchisor can usually provide a range or the
average time most of their franchisees reached the break-even
point. That said, it's best to err on the side of caution; plan
for the longest amount of time in the range and try to
overcompensate for averages. Lastly, use your newfound franchisee
network! The folks you looked to for answers in the last question
will be just as helpful in answering this one.
WHAT IS MY TOTAL UPFRONT INVESTMENT?
Now that you have a better idea of how long it could take to see
a profit, it's important to consider your upfront costs
carefully. Remember, your upfront costs include both buying and
running the business until it makes a profit. The franchisor will
give you a general guideline in the estimated investment section
(Item 7) of the FDD, but existing franchisees are still going to
be your best resource. As always… Overcompensate! You'll only be
able to estimate the actual startup costs, so make sure you'll
have enough working capital.
HOW MUCH WORKING CAPITAL WILL I NEED?
Working capital (a.k.a. operating capital) is the money you'll
need to run your new business until your business starts making
as much money as you are spending. This includes both operating
expenses (such as your marketing costs, cost of employees, cost
of equipment and utilities, etc.) and your personal living
expenses. Since the break-even point could take longer than
expected and your expenses could be greater than expected, an
extra cushion of capital is a smart idea.
CAN I FINANCE MY FRANCHISE? HOW?
It is not uncommon for many new franchisees to finance their new
business through various and sometimes multiple sources. Check
with the individual franchisor first to learn about any financing
opportunities they may have available. It is also not uncommon to
secure finances via a loan from a local bank (typically these
loans will need a guarantee such as personal collateral, like
your home equity), family and friends or by taking on a business
partner who can financially support you through the start-up
phase. There are also companies who will help you borrow money
from your own IRA or 401(k) accounts, without early withdrawal
penalties, to finance a franchise business. It's important to
keep in mind that, no matter how you choose to finance your new
business, franchisors and banks will require that a portion of
the overall investment is met by you in cash. This is often
referred to as "having skin in the game." As a general rule,
businesses are more likely to be successful when those running it
have a personal investment.
Whatever means of financing you use, keep in mind two things:
1. It's never too early in the 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.
IS THIS FRANCHISOR FINANCIALLY STRONG?
This may not be a question you've thought of, but it's truly the
most important question you can ask. We've all been reminded in
the past few years how dramatically the economy can fluctuate and
when you're buying into a franchise, that company's financial
stability can and will affect your bottom line. Companies that
are financially strong will be able to support the franchisees
and will be better prepared for both economic shifts and the long
term. These companies are equipped with the necessary tools and
resources to continually build the brand and make changes to the
product / service / operating system as needed. This will give
your franchise a competitive advantage and keep your profit
margin consistent. The franchise's FDD will include their
financial statements. When in doubt, make sure to ask your
financial advisor for help.
Getting these financial questions answered is a pivotal step
in your franchise research. Take your time. Ask each and every
question, talk to as many people as you can and do your research.
When you find the right franchise, you'll be confident in your
purchase and ultimately more successful.
Here's to your success and best of luck!
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