Franchising puts thousands of people in control of their own businesses each year, but those who succeed don’t get there by luck––they did their homework first.
While we often hear hard work alone can get you anywhere, most franchisees know there’s more to it than that. Making smart decisions, especially early on, is equally important to making your investment a lucrative one.
One of (if not the) most crucial things to consider is money. Not only how much you have now, but how much you stand to make and when you can expect to see those earnings once you’re underway.
After speaking with our own franchisees to better understand the most important financial questions they needed to ask, we’ve put together the top five money questions all franchisees should consider before buying a franchise. Let’s get right into it:
1. How much money can I make owning this franchise?
It’s obviously the question on top of everyone’s mind, and it’s most likely the first question you want answered when researching franchise opportunities. Franchisors don’t have crystal balls to see into the future, but they can make good predictions based on how their franchisees fared in the past.
How to get income information from a franchisor you’re interested in:
The Franchise Disclosure Document
Many franchisors include earnings information directly inside the Franchise Disclosure Document (FDD). Whether it’s presented as a range of incomes or an average income across the entire company, Item 19 in the FDD can give you an actual number to use as a reference.
Talk to current franchisees
Item 19 in the FDD is great for getting a ballpark earnings figure, but talking to franchisees who have been in business long enough to start turning a profit can be an even better resource. If you’re comfortable asking, and they’re comfortable talking money, existing franchisees can offer up firsthand information about how much they’re making, when they became profitable, and more.
2. What is the total investment for the franchise?
Smart franchisees know what to expect and protect themselves financially if unforeseen expenses pop up. Don’t sign anything until you’re well aware of all upfront costs listed in the FDD.
Ask current franchisees about other expenses
Again, talking to current franchisees about any unexpected costs is crucial.
Have a cushion of capital just in case
Keep in mind that all your figures are just estimates. Have a plan in place to have more than enough working capital to draw from in case something unexpected happens.
3. When will I break even with my franchise?
Being successful means being realistic. Just like any other business, profits don’t happen overnight. In fact, it could be over a year before you hit that break-even point and start putting earnings in your pocket.
Talk to the franchisor and plan for the worst
Have a serious discussion about when you can expect to see profits in your market. Once you have a range of time from the franchisor and/or franchisees themselves, plan your finances to anticipate the longest period of time.
4. How much working capital will I need?
Working capital are the funds you will have to put into the franchise until you’re making as much as you’re spending. Consider the following when working out how much you’ll need:
- Cost of lease
- Cost of payroll
- Cost of equipment
- Cost of utilities
Again, plan for the worst. Leave yourself a cushion just in case you need it.
5. How can I finance my franchise investment?
When it comes to financing a business purchase, you have a few options:
1. Get a bank loan
Securing a bank loan usually means putting up personal collateral.
2. Get an SBA loan
We discuss SBA loans in depth here.
3. Take on a business partner
Obviously this is no small choice, but many franchisees pool their finances in order for lower risk to each person.
4. Borrow from your IRA or 401(k)
Many programs allow you to draw from these accounts without penalty when financing a business venture.
Interested in a low-cost franchise opportunity offering low startup costs and minimal monthly overhead? Click here to learn why The Groutsmith stands out as the leader in grout and tile cleaning, repair and restoration. Want to connect with us one-on-one to get started? Contact us today.
Looking to learn what it’s like to own a Groutsmith franchise? Get a first-hand look from eight franchisees in our free Q&A guide. Click below to download.