Before you consider a franchise purchase, you need a thorough understanding of your investment level to meet the concept’s financial requirements and obligations. Much like pre-qualifying before you buy a home, you should establish the full range of your financial capabilities before you make the rounds with a realtor. Many entrepreneurs investigating franchising as their preferred route to business ownership openly wonder, “What does it really cost?” In this blog, we’ll educate you on the associated costs required to meet your financial obligations to purchase a franchise.
As you review, remember this point: there is no automatic correlation between what it costs to buy a franchise and how much money you will make. The purchasing price of the franchise concept has little to do with how much revenue you’ll potentially earn
Just the Facts
Let’s start with the basics. To buy a franchise, you’ll be responsible for the initial fee and ongoing royalty payments once you’re operational. This buys you the trademarks, training and support, a protected territory and the right to use the proprietary business model for selling the franchise’s product or service. The franchise fee, a one-time payment, is typically based on a sliding scale, determined by the brand’s profitability.
Franchisors only accept candidates who meet their net worth requirements. In a typical situation, you should plan on having 25-30% of the total investment in cash, while financing the balance. You’ll also need enough operating capital to tide you over until you reach break-even status or profitability.
Where the Similarities End
The initial fee, royalty payments, and operating capital are universal franchise costs. But additional costs may also apply, depending on the type of franchise you’re buying. These include buying or leasing a location, security deposits, equipment, inventory, and even marketing fees.
The good news for potential franchisees is that these additional costs are shared in the Franchise Disclosure Document (FDD). These disclosures are mandated by law in the FTC’s Franchise Rule, requiring franchisors to supply full disclosure of the information a prospective buyer needs in order to make a rational decision on purchasing.
And Don’t Forget...
There’s one more step in solidifying your financial plan to buy a franchise--a professional review. It’s highly advisable to have your purchasing plans reviewed by an attorney and a certified accountant. Their counsel and approval should validate your decision to move forward and sign on the dotted line.
The sections above cover the basics of what you can expect in buying a particular franchise. Working with franchise brokers or consultants can give franchisee candidates an advantage, as well as confidence and peace of mind, knowing they’re making the right decisions throughout the process. Franchise consultants can also provide several financing options unique to the industry—including your potential use of tax-free and penalty-free 401(k) or IRA funds.
Solidifying financial plans for funding the purchase of a franchise should be an essential part of your pre-investigative process. Meeting the financial requirements to open, operate and maintain a franchise of your own is a necessary hurdle to clear before you can make your entrepreneurial dreams come true.