See what factors you should consider when determining if you can afford to buy a franchise. You may qualify for various funding options.
Do you want to buy a franchise but think you can't afford it? It's true that your salary alone probably isn't enough to finance a franchise purchase, but this dream is still possible even on a relatively tight budget.
Understanding your financial position is essential. Determine how much money you can pay out of pocket for a franchise as well as your lending options. Clear knowledge of all this information will be key in deciding what types of franchise opportunities you can afford.
Understanding the startup costs
Startup costs vary widely, ranging from $10,000 to more than $1 million. The cost largely depends on whether you have to own or lease real estate. You will get a Franchise Disclosure Document (FDD) from the franchisor to show you the required costs. Item 5 is the initial or franchise fee, which is typically $10,000 to $40,000. Item 7 lists additional costs, such as real estate, equipment, inventory and insurance. Make sure you also budget for accounting and legal advice.
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Evaluating your financial position
The first step in determining how much you can afford is to get a handle of your net worth, including how much cash you are able to put toward the initial investment. Take the time to put all your financial information down in black and white – assets and liabilities. You can and probably will obtain some financing for your franchise (more on that in a moment), but you will have to provide some funds of your own. It's important that the money you contribute to the franchise purchase is something your net worth can accommodate.
Most experts recommend that a prospective franchise buyer bring to the table 20 to 25 percent of the total investment for their franchise. As an example, if you only have $50,000 to invest, you shouldn't consider anything over $200,000. For your investment budget, that would be considered a high-capital franchise.
Researching your loan options
If you are like most prospective franchisees, you will seek outside financing to help you with your dream of purchasing a franchise. This is yet another area where you will be glad that you have figured out your financial situation.
There are several different loan options, including Rollover for Business Startups (ROBS), Small Business Administration (SBA) loans, home equity loans, a second mortgage, financing through the franchisor or just using money from savings.
With any of these options, the lender will need to see a detailed account of your finances, including your credit rating, copies of your tax returns and a personal financial statement. Some franchises have their own lending programs, but the same information will still be relevant.
Finally, the name of the franchise you are interested in can have an impact on your ability to get a commercial loan. Respected and well-known franchise names that have a good performance track record are more likely to garner a loan officer's buy-in.
Choosing the right franchise
The type of franchise you are interested in can also impact how much money you will need before you break even. A cheap franchise will cost you less money upfront, but it also may not generate enough, as quickly as you need it, to replace the income you were making before buying your low-cost franchise.
Why is this important? Because most, if not all, franchise owners will require a cushion while their franchise grows and establishes itself. It can take several years for you to earn from the franchise what you were making prior to going into business for yourself. Having a cushion of money that you can live off of as your franchise gets up and running is essential.
It is recommended to consult with a financial advisor if at any point in this process you have questions or concerns. An outsider can not only give you a clear-eyed view of your financial position, but also assist you in determining the best route to achieving your dream of owning your own low-cost franchise.