Important Money Questions for Franchisers

While visions of dollar signs dance in your head, take a moment to consider these important financial questions you should be asking.

How much is my initial investment in this franchise?

Your UFOC (Uniform Franchising Offering Circular) will give you detailed information about fees, expenses, and financial arrangements, as well as much more. Call other franchisees and ask them about the market in your area. If you can't get an exact figure, assume that your initial investment will be high.

How much should I have in operating capital reserves in case I need to cover any losses between the start of the franchise and when I start to break even?

You're wise to recognize that profits won't start right away. Revenue has to grow steadily over time before it outpaces expenses. Plan to put your cash directly into the business to cover any bills. If you add too many funds to your financial reserves, you might need to draw it out again too often.

How much extra money should I have on hand for living expenses, etc.?

Many franchise struggle initially. Planning a budget is very important. If you know precisely what your needs are, you can plan to have enough cash to cover them each month. Try to build up an additional reserve as well. You should consider your initial investment to be over and above your living expenses.

How long will it take for my new franchise to break even?

That depends on many factors, including the type of business you have. It's uncomfortable to have to funnel extra funds into your franchise to cover any initial losses, but you should think of this as a necessary evil. Each franchise has a definite break-even point. Assume it will take the entire estimated time to reach this point. You may be lucky and reach it sooner, but never assume so.

Do I have to make my total investment in cash?

This depends on the business. It varies from 2 percent to 98 percent. Talk to the franchise company and be sure you understand what their requirements are. Expect to need to have your investment in cash.

What kinds of financial options are available?

Bank loans for franchising should be secured by collateral, home equity, or through an SBA guarantee. Many franchisees suggest securing a home equity line of credit. Commercial leases are also an option. These are quick to procure and are secured by leased assets. Family and friends can also help you acquire your start-up funds. Sometimes you can draw on an IRA or 401(k) account without penalty.

How much can I expect to earn?

In your first year, you will probably see losses. By year three, expect profits to come in steadily. Talk to established franchisees about their experiences.

Is the franchise company profitable?

Be sure to obtain all relevant financial information from the franchise company. This includes financial statements and their UFOC. They should have enough money to invest in training programs and support for their franchisees. If you don't understand the paperwork, it's worth your while to consult an accountant.