Of all the mistakes new business owners make, the most fatal is failing to anticipate the cost of going into, and staying in, business. When you begin to explore franchising, you quickly discover that one of its benefits is having franchisors who can help you avoid this common error.
The rules that govern franchisors require them to provide you with a disclosure document outlining, in addition to other information, the details of your initial investment. With a history of new franchise openings and knowledge of how the business typically operates during its initial period, experienced franchisors can estimate not only the cost of establishing the business, but also the working capital you'll need.
Keep in mind, however, that the information contained in a disclosure document, while accurate for the franchise system, may not be accurate for your particular location. Much of a given system's information is based on historic averages. Your costs will differ somewhat depending on your market, your costs for real estate and labor, and a host of other variables. With the help of an experienced franchisor, local realtors and other professionals, you can identify these market variables and more accurately estimate your total investment. Gaining an accurate understanding of your capital needs is the starting point in your search for funding.
Before you began your franchise search, you should have already determined how much you need to invest. You should have looked not only at your bank accounts but at your liquid assets as well and determined what they're worth either as collateral for loans or as saleable items. You may have also had discussions with family and friends to see whether they wanted to invest in your new business. Now, knowing what you need, you can start the process of determining where the rest of your initial investment will come from.
Michael H. Seid is managing director of Michael H. Seid & Associates, a West Hartford, Connecticut- and Troy, Michigan-based management consulting firm specializing in the franchise industry. Seid recently co-wroteFranchising for Dummies(IDG Books) with Wendy's founder Dave Thomas.