Top 10 Franchise Money Questions Answered
How much money to buy a franchise? Where to get the funds? How long until I see a profit? Our expert tells all.
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There are many reasons people decide they want to acquire theirown franchise business--and each of these reasons involves avariety of considerations. In the mind of most people contemplatingsuch a decision, however, there is one overriding factor: money. Ifyou're considering buying a franchise, you should be askingyourself 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 OfferingCircular (UFOC) document normally expresses this information interms of a very large range of possible answers. In your calls toexisting franchisees, and your research concerning your localmarket, make sure to narrow down these answers to provide asaccurate 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 tocover losses after opening the franchise until it reaches thebreakeven point in terms of cash flow? You're not going tohave any customers or revenue on the morning of your first day inyour new business, but you will have expenses. Until your revenuegrows enough to cover these expenses, you're going to have tofeed additional cash into the business to pay the bills. Makesufficient allowance for this factor in your plans and, when indoubt, guess high. No one has ever gotten into trouble on a newbusiness startup because he or she had put too much in financialreserves.
3. How much extra cash do I need to cover living expenseswhile I'm starting my franchise? This is one of thecritical areas many new franchisees fail to consider. Afterbecoming a franchisee, there's a gap in time before your newbusiness begins operation and typically another gap before itstarts making enough profit to cover your living expenses. You needto carefully budget your living expenses to understand how muchyou'll need on a monthly basis and then make sure you'vegot sufficient cash--in addition to your business investment--tocover your expenses during this period. Then add a significantreserve on top of this amount--it'll help you sleep better atnight.
4. How long will it take my new franchise to reach breakeven? This is one of the most important money-related questionsyou'll need to answer. It's no fun to feed extra money intoa business to cover operating losses, but that's the reality inmost startups. You'll normally find the answer to this questionis a potential range of time for the franchise you'reconsidering. Always plan that it'll take the longest timewithin this range to reach breakeven, so you're as safe aspossible.
5. How much of my total investment (including capitalreserves) do I need to have in cash? This answer can range from0 to 100 percent, depending on the franchise business beingcontemplated. There's no right or wrong answer--just make sureyou know what applies to you and that you easily have that amountof cash on hand.
6. What standard financing options exist for me? The mostcommon forms of standard financing are bank loans and/or commercialleases. Any bank loan to start a new business will probably eitherhave to be secured by your personal collateral (such as the equityin your home) or through an SBA guarantee program, and the banksmay require both forms of security. Most new franchisees find thatsecuring an open line of credit against their home equity is theeasiest and least expensive form of bank financing available tothem. Leases can also be a favorable option, since they aretypically fast to procure and secured by the assets that are beingleased (though they sometimes require a personal guarantee aswell).
7. What alternative financing options exist for me? Inaddition to standard sources, there's always the standbyfinancing source: family and friends. There are also a number ofcompanies that assist people in accessing retirement dollars in IRAor 401(k) accounts, without early withdrawal penalties, to use as afunding source for a franchise business.
8. How much money can I make in this franchise? This isthe $64 question. You will normally find the answer is related tothe amount of time the business has been open. The first year willprobably be a loss, but by the third year the business should bemaking good money. Ask a lot of existing franchisees about theirexperience at these levels, and make sure you know what yourprobable income will be by the time you complete that criticalthird year.
9. What are the ranges in financial performance of theexisting franchisees? Though we've previously referred tothe fact that there is going to be a range in franchisees'answers, this point is so important, it bears repeating. Don'tstop your research until you are completely confident you know boththe high and low end of the range. Two answers are not sufficientto establish a range you can have confidence in--10 or even morewould be much better.
10. How financially strong is the franchise company? Thefranchise company is required to provide you with a copy of theiraudited financial statements in the UFOC document. You obviouslywant to work with a franchise company that is not only strongenough to survive, but that also has the resources to reinvest intraining and support of the franchisees. Make sure you review theirfinancials and ask for help from a competent advisor if you'renot comfortable doing this yourself.
You should know the answer to each of these questions before youdecide to invest in any franchise opportunity. If you do, andassuming the answers are acceptable to you, you can minimize someof your concerns about money as you build your new business.