According to the International Franchise Association, “franchising is simply a method for expanding a business and distributing goods and services through a licensing relationship.” When you purchase a franchise, you have a business model in place. You will follow the company’s business plan. A franchise is expensive to operate. In order to run a franchise, you must have access to cash. If you do not have cash, you will need to get financing. The price of a franchise will vary because of the industry. Therefore, it is important that you select a budget that you can afford before signing the franchise agreement. Here is how you get the right amount of capital for your franchise.
Buying a Franchise
First, determine how much money you can afford to spend on a franchise. Do not purchase a franchise if you are in debt. Do not spend more money than you can afford to lose on this project. Create a budget based on the type of franchise you want to operate. Contact the franchise company. Find out what is the total cost for the franchise. Research the company background. Contact franchise owners for information about the franchise. Check the Better Business Bureau for complaints. Make sure you read the operations manual. Moreover, contact the Federal Trade Commission to learn more advice about purchasing a franchise. These are the basic steps to help you get a franchise at the right price.
Obtaining Capital for Franchise
Next, do your homework to help you buy a franchise at the right price. Try to negotiate a lower price for your franchise. For example, if the project cost $50,000, try to get the cost down to $45,000 or $40,000. Call banks to find out what rates are available for the amount of money you need to borrow. Also, find out if the company is willing to finance the project for you. If you are approved, you make a monthly payment to the company. In some cases, you might can find a venture capitalist to help you fund this project. Keep in mind that the price of the franchise is going to be based on the company you want to buy. Use the Small Business Administration as a resource to help you get capital for a franchise.
Locating Franchise Opportunities
Then, you should take advantage of franchise opportunities. You can run an automotive franchise or a cleaning franchise. Some people start a day care franchise or a medical service franchise. The most common franchise is the restaurant business. Also, you can run a franchise from your home. Select a business opportunity that match your skills. When you operate a franchise, your chances for success is higher because there is a proven system in place. You have to follow the system. If you have the money, you can also buy a sports franchise. A sports franchise can cost a billion dollars.
Finally, buying a franchise requires extensive business research. You will probably need a lawyer, and an accountant to help you get the business running smoothly. Our research will help you purchase a franchise, obtain capital for a franchise, and locate franchise opportunities.
Being in the Know Before Buying A Franchise…It Makes Perfect Cents!
There are a few points to consider before purchasing a franchise with capital to get it off the ground. The capital will be based on which brand you decide to go with, your personal financial history and the resources you need in order to secure your investment.
Deciding on Brand
Before deciding on the amount of capital required to successfully purchase a franchise, it is important to do the appropriate research to determine the franchise brand you want to join. Knowing your market is a critical step to being well-prepared to enter the industry. For some people, they already have passion for an industry and are simply looking for the best options within that sector. This is usually the case for restaurants. For others, it is more about diversification, and so the exact area of their franchise is a little more flexible. No matter the case, you want to do a proper amount of investigation to minimize any surprises you may encounter on your journey. You want to be able to answer a few critical questions, such as:
- Does the company have a sound reputation?
- Has the financial viability changed towards an upward trajectory?
- Build-Out Costs: Is it more financially viable to build a new, updated location versus acquiring an already existing one (i.e. maybe the key clientele is already familiar with that location and changing it would disparage consumer traffic)
- Any fees that would offset your revenue stream
- Based on the current market, when would you expect an ROI (return on investment)?
- Required legal and/or accountant retainer fees
Every franchise will vary, but on average, you should be expected to pay between $20,000 – $50,000 for the initial franchise fee. With a corporation as large as McDonald’s, the franchise fee is measured at $45,000 to cover the cost of training, operational requirements, and selecting a location. The coverage will vary widely, so it is particularly important to call corporate offices to record the figures as required.
Personal Financial History
As you are working to secure your financing, it is important to know the overall amount upfront, beyond just the amount of total fees, that will be involved before you ever open the doors of your store. These values will be contingent upon a variety of market factors as well as your personal financial history. In general, about 25% of actual sale price in liquid capital will be required from you before the banks will consider loaning the remaining amount. For example, McDonald’s has a total sale price of $989,352 – $2,217,045 per franchise in addition to the $45,000 franchise fee. This means that the liquid capital required will come out to approximately $750,000 per location. This value will be contingent upon your financial ability and how much the bank is willing to loan towards the other 75%.
Securing Your Investment
In order to secure the investment on both ends, a few other requirements are listed. These include costs for insurance, which will vary widely depending on type ( i.e., property insurance, insurance against loss of inventory, liability insurance for customers and/or employees …etc). Other costs will include costs of accountants to ensure proper bookkeeping and personal taxes to avoid any IRS fees down the line and to optimize revenue is also a good idea to have a lawyer on retainer, averaged between $1500 and $5000, for any unexpected issues that arise. It is also very common to put down an amount of earnest money, ie good faith money, to show that you are serious about the transaction before signing the Purchase Agreement.
Ultimately, there is a large sum of money and support required to go into a franchise successfully, as well as having enough to cushion the time it will take to make a good return on your investment. So plan carefully, do your research and you’ll be enjoying the fruit of your labor in no time!