Finding Out What a Franchise is Going to Cost

The Money Thing

Owning a franchise is an expensive operation. You will need money to help you through the lack of customers usual at the start in a new business until customers get to see what you have and if they like it. This is generally through word of mouth, so it will take some time before you begin to make money. As a rule, expect a business to lose money the first year. It can take time to build a business, generally about three years before you start making good money. There are several ‘money' questions you will need to ask yourself before buying a franchise.

• What will be the total investment this franchise will require?
  Since the Uniform Franchise Offering circular or UFOC document will include this information, they are usually within a wide range of answers. You will need to make calls to existing franchisees to make sure that you can narrow the figures down, which may provide a more accurate view of the business.
• How much will you need in operating capital reserves due to losses until reaching the ‘break even' point?
  It will take time to develop your customer base so you need to be prepared cash wise to cover expenses. You will need to make sufficient allowances in your investment and put into your business plans to get the bills paid. If you don't know the numbers, guess and always guess high.
• How much extra cash will be needed to cover living expenses when first starting the franchise?
  This is a critical issue and is one that many fail to recognize or consider. There will always be a gap in time before the business is operational and another gap before it starts making a profit to cover your living expenses. You will need to budget your living expenses very carefully so you will understand how much you will need on a monthly basis. You will also need extra cash to cover your expenses during this period.
• How much of the total investment, including capital reserves is needed in cash?
  There is a large range in this answer as it can range from 0 to 100 percent depending on the franchise. You should make sure you know what applies to you and that you easily have that amount of cash on hand.
• What standard financing options exist for me?
  Of course the most common financing will be in the form of bank loans and/or commercial leases. Any bank loan that will be used to start a business will either have to be secured by your personal collateral, such as the equity in your home or you can use SBA guarantee program. Most new franchisees find that securing an open line of credit against their home equity is the easiest and less expensive form of financing. Another financing option is leasing a business. They are generally fast to get and secured by the assets being leased. Some leases however, may require a personal guarantee as well.
• What alternative financing options exist today?
  There may be standby financing sources, such as family, investors and friends. There are some financing companies that help people access retirement dollars in an IRA or 401(k) accounts without early withdrawal penalties.

As with any business, there will be highs and lows as the ranges in financial performance can change from time to time. Don't stop your research and make sure the franchisor is financially strong.