If you’re contemplating buying a franchise, the first thing you have to be clear on is picking a franchise that you will enjoy owning. Don’t pick one just because it has national brand recognition or because it promises to be lucrative.
It’s essential to take time to consider your personal interests. If, for example, you eat a healthy diet consisting of organic fruits and vegetables and free-range meats, you will quickly dislike running a fast food restaurant franchise – even if it is a famous brand and a moneymaker. Another thing you have to get clear about is if you like the franchise business model. If you like to do things your own way or if you’re a creative person who enjoys improving systems and processes, you might not like the highly detailed structure required of a franchisee.
Assuming that you’ve researched the best franchise opportunities and found one that is a perfect match for your personality and interests, the next thing to do is to think about things like the cost of investment, operating capital, how much money you could potentially make, and financing options.
Here are 7 steps to take:
1. Get clear on your personal finances.
Draw a line down the middle of a sheet of paper so that you have a column for all your assets and one for all your liabilities. Then list all your assets and liabilities in their respective column and add them up.
2. Work with a financial expert.
Even if you’re savvy about handling money and figuring things out, you should talk to a financial expert. Ideally, find someone who knows a great deal about franchise financing.
Speaking with an expert provides three benefits over thinking about the finances by yourself:
- You’ll be able to bounce ideas back and forth and come up with creative options.
- You’re less likely to make mistakes or overlook things.
- A financial expert might suggest things that you didn’t even know about.
Remember, buying a franchise is a major investment. Working with an expert will help you get a much better picture of all the various pieces involved in running a franchise and give you a realistic idea of what you can afford, the terms of the agreement, how much you should put down, and how much revenue to reasonable expect.
3. Understand your operating capital needs.
You need to think beyond your initial investment and get a good idea of day-to-day operations. By speaking with the financial people at corporate headquarters, as well as talking to successful franchise owners, you will get a good idea of average costs.
4. Estimate your profit potential.
When trying to figure out your profit potential, it only too easy to become overly enthusiastic about the upside and to dismiss any warnings about the downside. For instance, it may take longer to turn a profit than you would like and it’s tempting to believe that you can turn things around faster because you’ll work longer, harder, and with more dedication than the other franchise owners. So, when gathering data on the profit potential from multiple sources rather than just relying on the figures given by the franchise corporation, try to get a balanced view—looking at both best case and worse case scenarios.
5. Decide how much money you should invest.
While it’s unrealistic to assume that you can avoid investing any of your own money, you also don’t want to invest more than you can afford to lose. A figure suggested by financial experts in the franchise industry is about 15 to 25 percent of your own money. Of course, this is by no means a solid rule, and it depends on your net worth, your liquid assets, and what you and your financial adviser decide will work out best for you. While a lender would like to see you come up with 20 to 25 percent, this may or not work for you. If it doesn’t, don’t feel pressured to invest a larger sum of money than you feel comfortable afford.
6. Consider your financing options.
Besides traditional lenders, you have other options ranging from a repayment guarantor like the SBA to non-traditional lenders. You can also source money from family and friends. Make a list of all possible sources and talk to everyone about how much they would be willing to invest. It’s important that you realize that all the money doesn’t have to come from one source. If getting a large sum of money from one source comes with a high interest or other demands that you will find hard to meet, research all your financing options.
7. Avoid Overoptimism
When building your franchise business, you have to understand that you may or may not earn your projected revenues on schedule. Remember, you are learning a whole new business and it’s quite possible that it might be harder than you thought and you might also make some errors in judgment. Remember, too, that you are building a customer base from scratch. While you may have a good theoretical understanding of how the business works, your experiential understanding will be slightly different.