Buying a Franchise
The finances of buying a franchise
When looking into buying a franchise, the No. 1 question you should ask is: can you afford to become a franchisee? Not only do you need the funds to buy the franchise, but you also need to support yourself (and your family) during the first year or two as the business gets up and running.
According to the U.S. Small Business Administration, the main reason wannabe franchise owners fail is because they do not have enough money during the most critical phase - the beginning.
If you are seriously considering buying a franchise, answer these questions:
- Do I want to go this alone or should I recruit a partner?
- What is my net worth?
- What liquid investments do I have?
- Do I have good credit?
- Can I borrow money to get started?
- Does the franchisor offer financing?
You must pay the franchisor a franchise fee to cover the cost of your training, screening, and application. This can cost up to $100,000 but expect to pay $20,000 to $25,000. For example, the franchise fee for a Gold's Gym is $20,000.
Your start-up costs can range from $20,000 to $1 million but are usually around $100,000 to $300,000. Start-up costs for franchises operated from a store are higher than those based in a van or in your home.
Franchisors require a liquid capital investment of 35 to 50 percent of the total franchise cost (fee plus start-up), e.g. Kwik Kopy Printing requires a total investment ranging from $175,000 to $227,000.
The franchisee then pays the franchisor an ongoing royalty fee for the duration of the franchise. This amount is a percent of your gross sales, e.g. Wendy's royalty fee is four percent.
And don't forget the 'other' costs. For example, if you decide to rent or build a location, expect to pay real estate agent fees, a security deposit, zoning fees, an architect, a contractor, construction, insurance, taxes and landscaping. all before you even lease or buy the equipment and purchase inventory!
If you find yourself coming up short, investigate solutions for financing. Does the franchiser offer in-house or third party financing? Research and write up a complete business plan, including a mission statement, industry analysis, financing options and timetable. Discuss your options with a bank that has experience with small businesses, for business loans are different from personal loans.