There are many reasons people decide they want to acquire their
own franchise business--and each of these reasons involves a
variety of considerations. In the mind of most people contemplating
such a decision, however, there is one overriding factor: money. If
you're considering buying a franchise, you should be asking
yourself a number of significant money-related questions.
Here's what we consider the "Top 10":
1. How much total investment will this franchise require?
This is a key question, since the Uniform Franchise Offering
Circular (UFOC) document normally expresses this information in
terms of a very large range of possible answers. In your calls to
existing franchisees, and your research concerning your local
market, make sure to narrow down these answers to provide as
accurate an answer as possible. If you aren't completely sure,
be sure to err on the high side.
2. How much will I need in operating capital reserves to
cover losses after opening the franchise until it reaches the
breakeven point in terms of cash flow? You're not going to
have any customers or revenue on the morning of your first day in
your new business, but you will have expenses. Until your revenue
grows enough to cover these expenses, you're going to have to
feed additional cash into the business to pay the bills. Make
sufficient allowance for this factor in your plans and, when in
doubt, guess high. No one has ever gotten into trouble on a new
business startup because he or she had put too much in financial
reserves.
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3. How much extra cash do I need to cover living expenses
while I'm starting my franchise? This is one of the
critical areas many new franchisees fail to consider. After
becoming a franchisee, there's a gap in time before your new
business begins operation and typically another gap before it
starts making enough profit to cover your living expenses. You need
to carefully budget your living expenses to understand how much
you'll need on a monthly basis and then make sure you've
got sufficient cash--in addition to your business investment--to
cover your expenses during this period. Then add a significant
reserve on top of this amount--it'll help you sleep better at
night.
4. How long will it take my new franchise to reach break
even? This is one of the most important money-related questions
you'll need to answer. It's no fun to feed extra money into
a business to cover operating losses, but that's the reality in
most startups. You'll normally find the answer to this question
is a potential range of time for the franchise you're
considering. Always plan that it'll take the longest time
within this range to reach breakeven, so you're as safe as
possible.
5. How much of my total investment (including capital
reserves) do I need to have in cash? This answer can range from
0 to 100 percent, depending on the franchise business being
contemplated. There's no right or wrong answer--just make sure
you know what applies to you and that you easily have that amount
of cash on hand.
6. What standard financing options exist for me? The most
common forms of standard financing are bank loans and/or commercial
leases. Any bank loan to start a new business will probably either
have to be secured by your personal collateral (such as the equity
in your home) or through an SBA guarantee program, and the banks
may require both forms of security. Most new franchisees find that
securing an open line of credit against their home equity is the
easiest and least expensive form of bank financing available to
them. Leases can also be a favorable option, since they are
typically fast to procure and secured by the assets that are being
leased (though they sometimes require a personal guarantee as
well).
7. What alternative financing options exist for me? In
addition to standard sources, there's always the standby
financing source: family and friends. There are also a number of
companies that assist people in accessing retirement dollars in IRA
or 401(k) accounts, without early withdrawal penalties, to use as a
funding source for a franchise business.
8. How much money can I make in this franchise? This is
the $64 question. You will normally find the answer is related to
the amount of time the business has been open. The first year will
probably be a loss, but by the third year the business should be
making good money. Ask a lot of existing franchisees about their
experience at these levels, and make sure you know what your
probable income will be by the time you complete that critical
third year.
9. What are the ranges in financial performance of the
existing franchisees? Though we've previously referred to
the fact that there is going to be a range in franchisees'
answers, this point is so important, it bears repeating. Don't
stop your research until you are completely confident you know both
the high and low end of the range. Two answers are not sufficient
to establish a range you can have confidence in--10 or even more
would be much better.
10. How financially strong is the franchise company? The
franchise company is required to provide you with a copy of their
audited financial statements in the UFOC document. You obviously
want to work with a franchise company that is not only strong
enough to survive, but that also has the resources to reinvest in
training and support of the franchisees. Make sure you review their
financials and ask for help from a competent advisor if you're
not comfortable doing this yourself.
You should know the answer to each of these questions before you
decide to invest in any franchise opportunity. If you do, and
assuming the answers are acceptable to you, you can minimize some
of your concerns about money as you build your new business.
Jeff Elgin is the "Buying a Franchise" coach at
Entrepreneur.com and has almost 20 years of
experience in franchising, both as a franchisee and a senior
franchise company executive. He is currently the CEO of FranChoice Inc., a company that provides free
consulting to consumers looking for a franchise that best
matches their needs.