Among people that I talk to about franchise ownership, the most frequently asked questions revolve around….money. This is natural and understandable. It is a big investment and you need to understand the details about a range of finance and money related questions. Here are the biggest money related questions about franchise investment that you will need to answer as you start your exploration.
How much investment is required to own a franchise?
What would you say to me if I asked you, “How much does it cost to buy a house?” Your answer likely would be, “It depends.” That is my answer too!
There is a wide range of investment levels in the franchise world. There are very successful franchises with a total required investment of $50,000. Similarly, there are very successful franchises that require an investment of $3,000,000!
As a starting point to understand required investment levels, I would encourage you to review the franchise company’s Franchise Disclosure Document or “FDD”. This is a document that presents a mountain of information from the franchise company. One of the disclosures in the document is Item 7 which presents the low and high estimates for total required investment in that franchise. The Item 7 is presented with line item detail so that you can you understand exactly what costs accumulate to the total.
For even more specific, detailed information, I encourage you to talk directly with the current franchise owners. Because they have already worked through the opening and ramp up process, they will be able to share with you their actual experiences and you can gather great details from their stories.
How can I afford to invest in a franchise?
When we start to discuss franchise investment, I draw a parallel once again to buying a house. When you look to buy a house, you will likely use a combination of equity and loan financing. That is, you will use savings to make a down payment and then borrow the additional capital from a bank. You can use the same combination for investing in a franchise.
In franchising, the down payment portion of the investment is normally 30% of total required investment. If you are looking at a franchise a $100,000 total investment, your down payment would only be $30,000. This down payment could come from cash savings, utilizing a rollover from an IRA or 401-k account or even from an investment partner will be not be active but will only be an investor.
The great news about financing is that bank loans are readily available for franchises. Because banks can study the prior history of the franchise and become comfortable with the successful track record, banks love to lend money to franchise businesses as they feel confident in their success. Banks are typically lending 70% of the total investment into most franchises.
So, as you start to think about franchise investment, realize that the amount of investment is reasonable, and you have more financing options than you may have known.
How much money can I really make?
This is the ultimate question, right? If you are going to make an investment and invest time to guide the success, you expect to make a solid return on your investment.
As you begin to explore a franchise, the franchise company often shares with you some information about financial performance of its existing locations. This information is shared in the FDD in Item 19. In this disclosure, the franchise company can share with you selected financial performance of either corporate controlled locations, franchise owned locations or both. They company can share revenue only information or may add additional disclosures regarding margin or profitability.
The Item 19 is only a starting point. The real exploration of profitability occurs through conversations with the franchise owners. You will find in every franchise system some of the owners are willing to share, very openly, their financial results and help you to get answers to your detailed questions about income potential. You should know, not ever franchise owner is comfortable disclosing their income so you should not expect 100% of the owners to be completely transparent. But, you will find enough information to be able to build your own income estimates.
As you investigate a franchise, getting answers to these money related questions will help you to determine if a one franchise is the right match for you.
If you are looking for more detailed information about this article or want to begin an individual exploration into franchising, please reach out today and schedule an appointment for us to meet.
