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How to Know if You Can Afford a Franchise

How to Know if You Can Afford a Franchise

 

“How much will it cost me?” It is a major question for anyone, regardless of the brand they’re considering investing. Buying a franchise is a major purchase and the risk of being unsuccessful is always there. However, those that are ready for the challenge have a great chance at growing their business and their bottom line.

 

The success of a franchisee can be determined by multiple things: work ethic, personality, and skill set to start. But obviously a critical component needed to purchase a franchise and make it successful is money. When looking at various franchise opportunities, it’s important to have the capital needed to start the business and keep it running in its infancy. I would estimate that a large majority of franchisees who fail within the first 12 months of business were sorely undercapitalized.

So, how do you know if you can afford a franchise? As Senior Director of Franchise Development for HomeVestors, a real estate franchise company, I can say there are a few things needed to carefully consider before signing the dotted line with any brand.

First and foremost, you should review the brand’s Franchise Disclosure Document (FDD) with a franchise attorney. This document will carefully outline all of the potential investment costs associated with your pending venture. It is important to review the entire document. The FDD contains sections about costs, fees, and other monetary considerations, including but not limited to the following:

  • Item 5: Here is where you’ll learn about the initial franchise fees. These need to be paid upfront before you can begin the process of opening your franchise location and training.
  • Item 6: In addition to the initial franchise fee, franchisees are expected to pay ongoing royalties, advertising fees and other various fees. These essentially pay for the support they will receive from the franchisor throughout the life of your agreement. These also help fund any advertising campaigns the franchisor is executing to increase brand awareness and business generation.
  • Item 7: This section provides prospective franchisees with the total investment range along with an itemized list of where the funds are allocated. Included in this range are costs associated with initial training, lodging, and travel.
  • Item 19: Lastly, franchisees should see if the franchisor has an Item 19 listed in their FDD. Also known as Financial Performance Representations, this item can give a prospect an idea of sales, income, or profits being generated by franchisees in the system. Reviewing this section provides greater clarity about the overall health of the system.

As you begin connecting with various franchisors about their opportunities, you’ll likely be invited to a series of calls, including an FDD review call, where many of these details will be discussed and where you can ask questions about anything in the FDD. During this education process, you’ll also be asked about your current financial situation, so be prepared to disclose your net worth and liquidity. If you’re uncomfortable with sharing that information due to lack of funds, communicate that with the brand’s representative and they can walk you through your options.

If you’re someone who is set on starting their own business through franchising, but are concerned about the startup costs, I do have some advice for you. To start, it’s important to note that regardless of the brand, new franchisees must be prepared for the possibility of not making income at the start of their operations. All franchise prospects should prepare to have funds that cover the first three, six, or nine months of starting their business (sometimes more), in addition to the initial investment range as communicated by the franchisor in the FDD.

Franchise prospects should not just focus on the lower number when looking at the initial investment range. As someone who works for a franchisor, we always hope people can start their businesses for less than the top of the investment range, but due to various factors, that may not happen. I always say it’s good business practice to hope for the best but plan for the worst.

However, it is worth mentioning that there are several different franchise types in the industry – many with affordable startup costs. With the world becoming increasingly more comfortable with working from home, there are business opportunities that can be run right from your house or home office. When you don’t have to purchase or rent an office space, it’s possible to save quite a bit of money as you’re first starting out.

Some franchises offer investors multiple ways to build their businesses – whether in a part-time or full-time capacity – based on what works best for them and their current situation. Part-time franchise opportunities often times allow you to continue working at your job or even pursue other ventures.

When starting a business money is always going to be vital. However, there are boundless opportunities to join a franchise that is within your price range. Be sure to prepare yourself before you start to have conversations with different brands. Knowing how much cash you have available will make selecting the right franchise opportunity much easier for you.

 

Adam Benshoof is the Senior Director of Franchise Development with HomeVestors