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Can You Afford to Buy a Franchise?

business.com editorial staff
business.com editorial staff

It's possible even on a budget, but you need to know your options and obligations first.

  • Even those on a budget can potentially purchase a franchise. However, you must understand the startup costs and calculate how much you need to open your business.
  • Researching your loans before you enter into any contracts is imperative to keep costs low.
  • Some of the top benefits of purchasing a franchise are that franchises offer a proven business model, and they make it easier to attract financing and new customers.

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 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 to decide what types of franchise opportunities you can afford.

Benefits of buying a franchise

These are the main benefits of buying a franchise, according to Franchise Hub:

  • Proven business model: There is no need to work your way up through trial and error; a franchise has already done the heavy lifting of finding a business model that works.

  • Easier financing: Another benefit of buying a franchise is that it is easier to attract financing. While banks and other organizations or individuals may be reluctant to help finance new businesses, a franchise comes with a trusted name and brand, which will make it far easier for you to attract financiers.

  • Well-known brand/trademark: Buying a franchise makes it much easier to attract customers as well. You will likely spend much less money on advertising, as word of mouth tends to serve franchises well, especially when a new location launches.

  • Training and assistance from franchisor: You won't have to create your own plan for company culture, how to train and lead your employees, or other management challenges. A franchise purchase comes with the support of the franchisor, which makes all these aspects much easier to manage and implement.

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 on your net worth, including how much cash you can 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 your net worth can accommodate the money you contribute to the franchise purchase.

Most experts recommend that a prospective franchise buyer bring to the table 20% to 25% 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 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 first.

There are multiple business loan and financing options, including rollover as business startups (ROBS), Small Business Administration (SBA) loans, home equity loans, a second mortgage, financing through the franchisor or just using money from your savings.

With any loan, 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.

The name of the franchise you are interested in can impact your ability to get a commercial loan. Respected and well-known franchise names with good performance track records 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 affect 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 money 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 a financial advisor if you have questions or concerns at any point in this process. 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 achieve your dream of owning your own low-cost franchise.

Image Credit: CherriesJD / Getty Images
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