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Important Points to Consider When Financing Your Franchise

So many people are quitting their jobs to purchase a franchise. Even business owners are considering purchasing a franchise in hope of it being a sure money-maker.

What about franchises are they attracted to? Many want the rewards of being a business owner with little risk. Purchasing a known brand, receiving comprehensive training and a proven business plan are all wonderful facets that attract potential franchisees.

Yet, many do not take into consideration the costs of purchasing a franchise and how much financial planning it actually involves. Buy in costs along with net worth requirements can make the cost extremely high. Franchisors also recommend up to 40% in cash to improve chances of obtaining loans. Franchisors look for a good credit score, minimum net worth and a large portion of money in potential franchisees’ banks to make certain that they can survive the first few months with no income.

Not to forget is what the banks require too. They look for excellent credit history. They need to see that potential franchisees are committed to the franchise and boast a good portion of funds to cover any losses. So, a good collateral and credit history is all fundamental in obtaining a loan form the banks.   

If the cost to start your dream is just too high, then try considering partners. Friends and family who have money are good avenues to consider.

Another strategy is to obtain a sale-and-leaseback financing deal with the franchise. In this arrangement, the franchiser buys the property and then leases it to the franchisee until a set buyout period.

Potential franchisees need to carefully examine their cash flow and whether they encompass enough saved to support themselves in the early days. At least 6-12 months of living expenses should be available to utilise while starting a business.
 
Important to remember is that even though franchisors provide estimated initial costs, those are just guidelines. It does not usually include real estate costs, licensing fees and costs to comply with city laws. These can significantly inflate the amount you require.

Many of the details can be found in the UFOC which includes the costs, obligations, financial data and litigation.

Understand the expenses involved. A big warning sign is when the items must be purchased straight from the franchisor at a significant mark-up over what other vendors charge. 
 
To ensure adequate savings, draw up a cash flow projection which include ‘best’ and ‘worse’ case scenarios. Seeing the actual financial picture will aid you in understanding exactly how much you need to save in order to start your dream. 

Remember that even a previous successful concept can fail. Find a business model that boasts a proven track record and do your homework. 
 
Other important points when wanting to purchase a franchise include:

• The amount of money you have to invest and how much you can afford to lose

• Being willing to take direction about how your franchise business is operated and knowing your obligations

• Check the costs and consequences should you wish to terminate the franchise agreement

• Being able and willing to work long hours in order to run your business until such time as a qualified manager is in place

• Chatting to other franchisees about their franchise experience

• Thoroughly research the franchise including their financial statements, litigation history and training and support services

• Employ a consultant, attorney and accountant to help you

• Being able to survive the first year without a paycheck

Owning a franchise has many benefits but there are a few things to consider and make certain of beforehand.

Once you have made certain of everything, then you have taken the first important step in making your franchise dream a reality.

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