Tweet

Ask These Money Questions Before You Buy a Franchise

Written by: Kimberly Ellis

Article Overview: Congratulations on your interest in buying a franchise! The number of companies that have chosen to grow their businesses through franchising and the number of people who have decided to own their own business through franchising is a testament to the power franchising has to make dreams come true. But there are numerous questions you will want to have answered before you commit to anything and asking MONEY questions may be the most important. Here are what we feel are the top money questions to ask – and get answered – when deciding on the purchase of a franchise business:

Ask These Money Questions Before You Buy a Franchise

Ask These Money Questions Before You Buy a Franchise


Congratulations on your interest in buying a franchise! The number of companies that have chosen to grow their businesses through franchising and the number of people who have decided to own their own business through franchising is a testament to the power franchising has to make dreams come true. But there are numerous questions you will want to have answered before you commit to anything and asking MONEY questions may be the most important.

Here are what we feel are the top money questions to ask – and get answered – when deciding on the purchase of a franchise business:

How much money can I make with this franchise?
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 UFOC (Uniform Franchise Offering Circular) 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 to talk to a number of existing franchisees who have been in business for several years or more and 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.

What is the total investment required for this franchise?
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 UFOC. 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.


How long will it take before I reach the break even point with my new franchise?
The reality is that your business will probably not make money during the start-up phase. You have to build up your customers or clientele and for most businesses that can take a period of time. The franchisor will be able to give you a range of time in which most of their franchisees reach the break even point but, to be safe, plan on the longest amount of time in that range rather than the shortest time.

What will I need in working capital as my business begins?
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 – the break even point. This includes both operating expenses (such as your lease, 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.

What are my options for financing my franchise?
There are several options for financing the purchase of a business. The most common is to obtain a bank loan, which will usually need to be secured by your personal collateral (such as the equity in your home) or through an SBA (Small Business Association) guarantee program, or both. Some 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 then 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.” This means that you are risking your own money as well as the bank’s money, giving you a stronger reason to make the venture successful.

Other ways to finance your franchise can be loans from family and friends or by taking on a business partner who has the money required. There are also companies who will assist you in borrowing money from your own IRA 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 and 2) having good credit and cash in the bank are always good ways to prove financial stability.

How strong is the franchisor financially?
This 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 position will be able to support the franchisees and will be prepared to survive over the long term, building the brand and making changes to the product / service / operating system as needed. The franchisor’s UFOC will provide you with their financial statements but if you aren’t sure what the figures mean, ask for help from your financial advisor.

Getting answers to these money questions is a critical step in your process of franchise research. Take time with each and every question and talk to as many people as necessary so that 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.

Related Articles
  How to find the best franchise opportunity for you!
  Do You Need Experience to Own a Franchise?
  FAQs about Franchises
  Reselling Your Franchise
  Franchise Fees Produce Income, but be Careful

Article Tags:



Related Forum Posts
Re: Enticing Franchises - Top 9 List - All Franchise listed above are in millions of dollars. Do you have the list of Franchise in thousands
Re: Info for would be franchisers... - [quote="Sebastien":1d29sdv1]Like Franchise Times, Franchise Update is a very practical magazine. There is no blah blah, just straight facts that anyone in the franchise community can relate to. I just want to mention that all these magazines are NOT franchisee oriented. I mean these magazines are for franchise professionals. If you're looking to buy a franchise, you won't find much information in there. To answer your question, getting published in Franchise Times was fairly easy. I don't want to brag too much but I think I am known in the franchise industry. I was the marketing guy at Franchise.com for a few years before joining my new company, the World Franchising Network. So people know me and I have a very good relationship with Nancy Weingartner, the Managing Editor at Franchise Times. I was talking with her at the last Franchise Expo South in Miami and she mentioned she'd like me to be profiled. I was like "ok, sure!". I like this franchise executive profile thing in Franchise Times as it is rarely BS. People are usually really natural in there.[/quote:1d29sdv1] Thanks for the follow up Sebastien! And I can't say that I'm surprised that networking with the right people and managing your relationships with them properly are the keys to being published. I guess the old adage holds true of "it's not who you know, but who knows you" that's important.
how much for a franchise fee? - Dear Colleague There is no easy answer to this question. Things to consider: [list=] The sizeof the Franchise Clent base Expected Turnover Intellectual Property costs (recoup) Number of Franchises Number of employees Original Set up costs Franchise admin costs An example: A franchise that I was involved in setting was to a simple "lawn mowing/home repair" franchise. The Franchise included national/local advertising - preparation of client lists - general admin - central accounting etc The Franchise involved 300-500 clients - and an annual turnover of about $300,000 . The annual franchise fee was $30,000. Hope that this gives you some idea Take care Ian[/list]
Re: Franchise Surveys - Another good tool to researching a franchise is to speak with their existing franchisees. This contact information is included in most Franchise Disclosure Documents. In order to get a Franchise Disclosure Document or FDD as it is often referred to, you will have to complete a basic franchise application. The franchisor will then usually provide you with the FDD at that time. Included in that book of information is a list of the existing franchisees, the contract, the investment information etc... This information is required by Federal Law to be disclosed to your prior to making a purchase. So be sure to do your research and start with the Franchise Documents to get the initial information.
Re: Which would you start: a Blog or Online Community? - It is a difficult decision to make. Lets start it this way - What are you more interested in? Money? or Friends? or Both? If its purely Money, then Blog might be an appropriate answer. But consider this - It will be people (visitors) that will bring traffic to your blog and then Money will follow. This will be possible after a time and during this time it will be your friends who will be the starters. If you are looking for friends only, then its true that not many will be interested in knowing how you have beaten them in the game or the other way round. So it will be preferable to have a Forum where they can share ideas with you and others. But you can share your insider knowledge with them and invite comments from your Blog. You can also put up information on what others (including your friends) don't know about Tennis. The blog you create can provide News, Inside Information and also Techniques that can be used by the new entrants in the world of Tennis.


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Life is a Balancing Act!

Why Use an Advertising Agency

Angel Investors Where Are You?

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.